Going from a high-growth pandemic winner to a post-pandemic value stock isn’t easy. Pinterest (PINS) has seen its shares drop so much that they are now trading below pre-pandemic levels. The company generates abundant free cash flow, has 15% of net cash on the balance sheet and trades at 20 times non-GAAP earnings. The company continues to progress to become an application where consumers can discover shopping ideas and also make the purchase. I rate the stock as a strong buy primarily due to strong free cash flow generation, which should help the stock earn a higher multiple.
PIN share price
After falling more than 70% from its highs, PINS is now trading below pre-pandemic levels.
Over the same period, PINS has grown its business significantly, including achieving strong profit margins on a GAAP basis. Previously the stock was an unprofitable high-flying growth stock – now the stock is priced as a legitimate value stock.
What is Pinterest?
PINS is one of many social networking sites, but with one twist: its users are more mission-oriented than users of other networks like Instagram or Facebook. This is an important detail to understand for their business model. We can see what PINS looks like below – I compare it to be very similar to Instagram, except with a clear slant for shopping.
PINS is a place where users can find ideas for making cakes, or designing the perfect outfit for the day, or anything else. Although PINS may look like Instagram, it is very important to understand the different intent. PINS seeks to transform into a shopping app, an app where users can find out what they are actually looking to buy and purchase it directly within the app. I expect this niche to help the company continue to increase its average revenue per user over time.
Benefits of PINS actions
PINS ended the year with another sharp deceleration in growth rates. Revenue was up just 20% from 43% in the third quarter and 125% just two quarters ago.
The number of monthly active users fell sequentially for the third straight quarter and ended down 6% year-over-year to 431 million.
Despite the decline in user numbers, PINS still managed to grow revenue with a 23% increase in average revenue per user.
Q4 ARPU of $7.43 is still well below $60.57 in ARPU displayed by Meta (NASDAQ:FB).
Although the growth deceleration was quite disappointing, PINS delivered strong profit margins, with adjusted EBITDA totaling 41% of revenue.
PINS has guided revenue growth for the next quarter among “teenage high”. While this is still another quarter of “normal” growth, investors may be pleased to see that this is a much more muted sequential slowdown in growth. It’s worth noting that PINS doesn’t face exactly the same post-pandemic headwinds as other companies, as its business model is one that caters to both in-home and out-of-home usage needs. As management discussed on the conference call,
“For example, Pinners’ propensity to adopt use cases like home decor or cooking in Q4 2021 was similar to what we saw in Q4 2019.”
Going forward, the company’s mission will be to continue to improve its importance as a shopping inspiration app, which will help improve its advertising prices.
Is PINS Stock a buy, sell or hold?
Based on the deceleration in growth rates we just saw, PINS did not have trading activity at the levels of just a few months ago. Yet at these levels, valuations have become far too pessimistic. At recent prices, PINS is now trading at 6x trailing sales and 20x non-GAAP earnings.
PINS ended the year with $2.5 billion in cash and investments against no debt. This net cash represents more than 15% of the fully diluted market capitalization. Over time, I expect non-GAAP profitability to translate into strong GAAP margins, especially as operating leverage sets in. While I don’t expect growth rates to return to the 80% level of the pandemic, or even the 40% level, I do expect the company to continue to increase ARPU through improved the relevance of its purchasing application. All this despite the likelihood that its user base won’t grow as quickly as social media competitors like Snapchat (SNAP) or Meta. The current stock price valuation is one in which the stock is trading at approximately 1x the price-to-earnings growth ratio (“PEG ratio”). For a company generating strong free cash flow with a cash-rich balance sheet, this type of valuation seems far too pessimistic, especially given the possibility of an upside surprise. I can see the stock trading down to at least a 1.5x PEG ratio, which is a non-GAAP earnings multiple of 30x or more. This represents a 50% increase in capital appreciation, which would add to the continued annual growth. The main risk here is that the company loses its relevance as a shopping app, in which case it may not be able to increase ARPU or control declining MAUs. In my opinion, the main competition comes from Meta, but the wide gap in ARPU between the companies makes me suspect there is some leeway here. I consider stocks a solid buy because the high profit margins make the stock a low-risk proposition.