Pinterest: Upgrading To Buy As Company Inflects On GAAP Profitability (NYSE:PINS)
In the current market environment, taking a fresh look at Pinterest (NYSE:PINS) is warranted, especially after its recent underperformance. Over the past year, Pinterest has leveraged AI and integrated third-party advertisements effectively. Management’s commitment to solid double-digit top-line growth forecasts for the coming years suggests its premium valuation may be justified. Despite the market’s rising valuations, Pinterest’s solid profitability, strong net cash balance, and clear visibility into growth rates prompt an upgrade to a buy rating. It’s important to note, however, that in comparison, Meta Platforms (META) still presents a more attractive opportunity despite Pinterest’s merits.
My previous analysis in December resulted in a downgrade due to concerns over valuation. Since then, Pinterest has seen its stock underperform significantly. The recent quarter’s performance, however, has shown promising signs of substantial recovery and growth, leading to a reassessment and subsequent upgrade of Pinterest to a buy rating.
In its latest quarter, Pinterest reported a 12% year-over-year revenue growth to $981 million. Notably, the company observed consistent growth in its US & Canada markets and a significant recovery in Europe. Despite previous geopolitical tensions impacting European growth in 2022, the landscape has shifted, offering Pinterest easier comparisons and a path to continued expansion.
The growth in monthly active users (MAUs) by 11% year-over-year was particularly compelling, elevating the user base to nearly 500 million globally. This growth underscores Pinterest’s relevance and expanding reach. However, the modest 2% increase in average revenue per user (ARPU) raises questions despite stronger regional growth rates, attributed to the faster-growing, yet lower ARPU-generating, European and Rest of The World markets.
Pinterest has also registered remarkable strides towards profitability, with adjusted EBITDA margins soaring to 37%. The company’s GAAP net income saw a significant surge, benefitted partly by the higher interest income in a rising interest rate environment. With $2.5 billion in cash reserves, Pinterest’s financial position appears robust.
Management’s guidance for the upcoming quarters suggests an upbeat revenue growth trajectory, further buoyed by advancements in AI integration. This technological enhancement is anticipated to elevate content curation, leading to more engaged users. The forward-looking statements also project modest margin expansions and a steady increase in revenue and EBITDA margins over the next three to five years. Moreover, improvements in the macroeconomic environment and increased ad budget allocations from large retailers signify a positive outlook for Pinterest.
While some may draw parallels with other platforms, Pinterest’s distinct user engagement, driven by mission-oriented users, sets it apart. However, the platform must remain vigilant of competitive pressures, particularly from larger operators that might target Pinterest’s niche market.
Trading at approximately 25x this year’s earnings estimates, Pinterest is not undervalued by traditional measures. Yet, the company’s trajectory toward sustained revenue growth, potential for 30% net margins in the long term, and a healthier balance sheet offer a compelling investment thesis. With these factors in mind, Pinterest is expected to generate significant compounded annual returns in the forthcoming years, despite looming risks related to competitive landscape and relevance.
Considering the solid financial position, accelerating revenue growth, and flourishing profitability, Pinterest now merits an upgrade to a buy rating. The shift reflects growing optimism for the company’s future prospects and its ability to navigate the competitive digital landscape successfully.
