Pinterest (PINS) has quickly grown into one of the most prominent Internet names globally over the past few years. The company ranks amongst the top 15 social networks in the world, encouraging millions of people daily to explore any possible idea imaginable.
Back in September, I wrote an article pointing investors towards focusing on the company’s monetization instead of user growth. Since then, the stock has been nothing but a roller-coaster ride, primarily driven by speculation over a potential acquisition by Paypal (PYPL), which, as turned out, won’t be happening.
Additionally, the stock just reported its Q3 earnings, which, as I had pointed out, featured a focus on user monetization – the most important catalyst for the company going forward, in my view. For this reason, I remain bullish on the stock. (See Analysts’ Top Stocks on TipRanks)
Q3 Results
While a potential acquisition by Paypal would have likely been an easy exit for some decent gains, with negotiations coming to an end, Pinterest investors should now focus back on the company’s own investment case. In my previous article, I argued that Pinterest is not a social media company in terms of how investors should value it.
Sure, it may report similar metrics; however, as an idea-sharing platform and visual discovery engine, Pinterest should periodically draw a diverse user base, not a constant user base on a daily/monthly basis.
Q3 results showcased precisely that. Global Monthly Active Users (MAUs) grew just 1% year-over-year to 444 million. This, of course, is a meager increase, but it also makes sense.
In the comparable period, last year, consumers would invest time and money to improve their homes following the rise in the working-from-home economy. With Pinterest being the ideal place to look for home-improvement ideas, MAU growth had been 37% in Q3-2020.
In my view, seeing the company retain its previously boosted user base is very positive. To expect further growth on top of last year’s boosted numbers would be rather unrealistic.
As far as monetization goes, which is where I had mentioned investors should focus on, Pinterest delivered fantastic ARPU (average revenue per user) growth, which amounted to 37% globally. Interestingly, in the U.S., ARPU grew by 44%, which is very optimistic since the U.S. always represents the most profitable per-user metrics in all social networks. Seeing above-average growth here is great news.
The company’s report continued on a positive note, with management expecting Q4 revenue growth to be in the high-teens percentage range versus the comparable period last year.
The Valuation
Following the news that a potential acquisition by Paypal won’t be taking place, at least not anytime soon, Pinterest shares have slid to 52-week lows. Considering that revenues for the year should land around $2.6 billion based on the first nine months of Fiscal Year 2021 and management’s guidance, the stock’s forward P/S ratio stands around 10.7x at the time of writing.
With adjusted EBITDA margins growing from 21% to 32% year-over-year, the valuation multiple seems rather inexpensive in my view. For this reason, I remain bullish on the stock.
It’s also worth noting that if Paypal was interested in acquiring Pinterest at much higher price levels (assuming a reasonable premium), it should confirm a couple of things. To begin with, it could mean that the stock is really undervalued. Alternatively, it could also indicate that Pinterest would make for a great acquisition candidate to multiple fintech companies due to potentially significant synergistic potential.
Wall Street’s Take
Turning to Wall Street, Pinterest has a Moderate Buy consensus rating, based on four Buys and 11 Holds assigned in the past three months. At $57.85, the average Pinterest price target implies 25.2% upside potential.
Disclosure: On the date of publication, Nikolaos Sismanis had a beneficial long position in the shares of Pinterest through stock ownership.
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