- Pinterest stock has collapsed in the last quarter due to (1) MAU headwinds and (2) the aftermath of the PayPal acquisition rumor.
- Despite this, analysts still expect Pinterest to grow over 30% in 2022. Pinterest has continued to expand ARPU.
- This means Pinterest currently trades for ~8x forward P/S. If Pinterest was valued like Snap, it would trade for ~$100. Buy the dip.
Pinterest (NYSE:PINS) stock has been quite volatile recently. The stock first saw a drop-off earlier this year due to what many investors would view as concerning MAU (monthly average users) trends. More recently, the stock first saw a jump as the PayPal (PYPL) acquisition rumor popped up, followed by a knee-jerk reaction even further down to where it was previously after PayPal denied that it was planning to acquire Pinterest.
Nevertheless, Pinterest is still a high-growth company with guidance for >40% growth in Q3. As such, I rate Pinterest a strong buy trading at just ~8x forward P/S (expected 2022 revenue).
First, to recap what happened in Q2, Pinterest disappointed investors with a severe deceleration in MAUs, and even a decline in U.S. MAUs. Pinterest attributed this to a reopening headwind, as people spent less time online. Nevertheless, Pinterest remarked that most of the MAU decline was due to low-revenue desktop users. At the time I also reminded investors that Pinterest had a far larger opportunity to improve ARPU (average revenue per user). The trend in U.S. ARPU has remained strong, and international expansion is also underway with even larger growth (although arguably a significant majority of the total userbase remains under- or even nonmonetized).
Source: Q2 earnings presentation
Overall, Pinterest has guided for low-40s growth in Q3. Although this implies flat sequential growth, that is more a testament to how strong Pinterest’s Q2 actually was. For comparison, I recently reviewed Twilio’s (TWLO) results, which posted similar organic growth and even after its sell-off trades at 18x P/S. At 18x P/S, Pinterest would be worth $74, far above its current $45.
Since short-term stock reactions may be driven by “beating” or “missing” certain key metrics, a short mention of MAU trends may be in order. I would not expect Pinterest to miss MAU estimates again, as it had already significantly reduced expectations going forward (and clearly these expectations are now priced into the stock). Specifically, Pinterest had already updated on its MAU trends one month into Q3: “Engagement headwinds on Pinterest have continued in July. As of July 27, 2021, U.S. MAUs have declined approximately 7% and global MAUs have grown approximately 5% year over year.”
As I have readily discussed in previous coverage, Pinterest has been heavily investing in expanding its platform. Initially, this was focused on increasing Pinterest’s use for shopping, resulting in a partnership with Shopify (SHOP) for example. As many have noted, Pinterest’s platform lends itself very well to advertising and shopping, hardly distracting from the user experience.
More recently, Pinterest has also expanded into video, and this year it has started to invest in a creator ecosystem to fuel long-term engagement. To that end, Pinterest TV was recently announced: “Pinterest wants to turn more users into buyers with Pinterest TV — a series of live, shoppable episodes featuring top creators.” Pinterest had also ‘warned’ investors that it would use some ad space for these video Idea Pins, resulting in a bit of headwind for revenue growth.
As mentioned, the key thesis for Pinterest is to continue to drive ARPU expansion (not unlike Facebook (FB)). To that end, despite all the ado about MAU trends, it seems analysts actually agree with this, since 2022 revenue is expected to grow 32% to $3.4B.
That implies Pinterest is currently valued at just 8.5x forward P/S. Such a valuation is even lower than Teladoc Health (TDOC) and also approaches Facebook’s (Meta Platforms) valuation.
Although the MAU trend is priced into the stock, investors should nevertheless be aware that Q4 will mark quite a tough comp as it lapses a ~75% growth rate quarter. As such, investors that might be looking for short-term alpha might be hindered by guidance that could well be below 30% growth, which could shift the narrative from a slowdown in revenue MAUs to a slowdown in revenue growth.
Additionally, given the changes going on in Apple’s (AAPL) iOS, there is currently some general bearish sentiment in advertising, as this has already impacted Facebook and Snap (SNAP). Nevertheless, I would expect Pinterest to be relatively unaffected by these changes, and for example Google (GOOG) delivered a strong Q3.
One could also note that if Pinterest was valued like Snap (even after Snap's recent sell-off), it would trade for close to $100, significantly above the rumored PayPal offer. As such, Pinterest stock either should not be held to the same standards, or should be revalued closer to Snap since both companies have been growing at very similar rates.
Pinterest's investments in its U.S. and international business should continue to fuel ARPU and hence revenue growth. As such, all signals indicate that Pinterest stock provides investors with a significant buy-the-dip opportunity in a growth company.
Still, although there is great argument to be made that the stock is currently (too) cheap, my Q3 preview did highlight a few things investors will be watching. Besides MAU upside or downside, the general slowdown in revenue growth could be given as a bearish argument, as Pinterest will be lapping two ~75% growth quarters.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of PINS either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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