Pinterest Could Be Worth Buying On Stock Weakness

It has often been said that a good business is not always a good investment. With dozens of stocks having yielded multi-fold returns over the past year, investors may need to wait patiently in order to invest in quality businesses at value prices.

Let’s take Tesla (TSLA) as an example. On Jan. 26, TSLA traded as high as $900.40, but in just over a month, the stock has seen a 27% correction in price. Steep corrections are likely whenever valuations get stretched, but at its current level of $653, TSLA stock might be worth accumulating.

Pinterest (PINS) is another stock that has surged nearly 300% over the last year. There are several reasons to remain bullish about the company, however, at a current price-to-earnings-ratio of 96.5, the stock looks expensive. A price correction in the foreseeable future could be a good opportunity to accumulate PINS stock.

Pinterest On A High Growth Trajectory

Pinterest has been delivering a robust set of financials which has pushed the stock higher. For FY2020, the company reported a 48% year-on-year increase in revenue to $1.693 million. For the same period, the company’s adjusted EBITDA was $305 million with an EBITDA margin of 18%. It’s worth noting that for FY2019, the company’s EBITDA margin was just 1%.

These factors have already been discounted into the stock price, however, PINS may be worth accumulating on pullbacks for the following reasons.

First and foremost, the company’s average revenue per user (ARPU) in the US was $5.94 in Q4 2020 compared to $4.00 in Q4 2019. For the comparable period, the company’s ARPU from international markets was $0.35 in Q4 2020 and $0.21 in Q4 2019.

There is still ample headroom for monetization in international markets. In the last few quarters, international ARPU has gradually trended higher, and if this growth sustains, international markets could deliver strong cash flows.

For Q4 2020, Pinterest reported 361 million monthly active users in international markets compared to 98 million in the US. Therefore, growth in international ARPU is likely to have a big impact on the top-line, EBITDA margin and cash flows. It’s unlikely that international ARPU will reach a par with the US, however, even if the international ARPU reaches $1, operating cash flows will surge.

Pinterest To Benefit From E-Commerce Growth

Another growth trigger for Pinterest is its inroads into the high-growth e-commerce segment. In May 2020, Shopify (SHOP) and Pinterest launched a new channel that allows merchants to turn their store products into “Product Pins.”

As e-commerce grows globally, this partnership will allow Pinterest to generate significant revenue from merchants who place ads on the company’s platform. Furthermore, it’s likely that an increasing number of merchants will advertise on Pinterest with the company witnessing steady growth in monthly active users.

According to the company’s Q4 2020 shareholder letter, product-only searches have increased by 20x since the beginning of FY2020. This is an indication of Pinterest being an equally good shopping platform.

What Does Wall Street Think?

Wall Street analysts remain cautiously optimistic with a Moderate Buy consensus rating based on 14 Buy and 8 Hold recommendations. The average analyst price target of $91.38 implies that PINS has around 23% upside potential over the next 12 months. (See Pinterest stock analysis on TipRanks)

Concluding Views

An asset-light model is among the reasons to like Pinterest stock. Currently, the company has a cash buffer of $1.7 billion. Furthermore, operating cash flows will increase in the coming years which will provide the company with ample financial headroom for growth.

Last month, it was reported that Microsoft (MSFT) approached Pinterest for a potential takeover valued at $51 billion. Given the cash flow potential in the coming years, along with an asset-light model, Pinterest might be looking for acquisitions rather than to be acquired.

One of Pinterest’s strategic objectives for the current year is to make the platform “more shoppable.” If the e-commerce integration strategy delivers results, PINS could be a long-term value creator.

Disclosure: On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.