A Year Since IPO and 40% Cheaper, Pinterest Stock Deserves Some Love

I first placed visual search, idea sharing, and shopping stock Pinterest (PINS -4.26%) on my watch list last autumn, after it declined some 30% from its all-time high shortly after the company made its public debut. I'm glad I waited. The stock has continued to tumble and is now 40% below those peak levels.  

On one hand, there are great reasons for this. As is the case with most social media platforms, advertising is the model for generating revenue. And now that coronavirus is wreaking havoc on lives and the economy, advertising budgets are likely to shrink. That doesn't bode well for Pinterest as it was already operating in the red.

On the other hand, though, this is a fast-growing corner of social media that was always a long-term play. With significant pain now priced in, it's time to revisit Pinterest stock.

Image source: Pinterest.

More people at home means more eyeballs but lower sales

Many digital businesses are getting a big bump in activity because of coronavirus. With millions stuck at home around the globe -- either by choice or by government decree -- the internet and the digital tools and entertainment distributed on it are more important than ever before.

For Pinterest, which allows users to search for, share, and "pin" ideas to their boards, extra idle time is sure to be a good thing for its growing user base.

Data source: Pinterest. YOY = year over year.  

As prolific as social media networks have become in the last decade, Pinterest is still riding some incredibly strong momentum. And with millions of new users signing up every year, paired with the rising use of e-commerce, the platform is only getting more lucrative for advertisers. But therein lies a short-term problem. Budgets for advertising tend to get cut during times of economic weakness, a situation that has surely arrived. Pinterest hasn't made any comments on its 2020 estimates yet, but social media giant Facebook (META -13.33%) has -- citing higher user engagement but lower ad spending in the countries hit hardest by COVID-19.  

Pinterest is a much younger social platform and has a faster-growing average revenue per user metric (ARPU) -- it was $3.81 in 2019, up 21% year over year. Facebook, on the other hand, posted a 13% increase in ARPU in the fourth quarter of 2019 across its family of businesses to $7.38. However, the smaller outfit could see a hit to its top line in the coming quarters if its business partners start to cut back on expenses. Nevertheless, after the sharp sell-off, Pinterest stock is trading for 7.6 times trailing 12-month sales versus 6.9 times for Facebook.

Deeper pockets than you might think

Of course, Facebook is in a very different place than Pinterest. Facebook generated $21.2 billion in free cash flow (what's left after cash operating expenses and capital expenditures) on $70.7 billion of revenue last year. Pinterest ran at negative $33.1 million free cash flow -- although it is quickly homing in on break-even.  

Even assuming some aggressive cash burn to promote growth and losses related to the coronavirus crisis, Pinterest is in better shape than one might initially think. Thanks to its successful IPO last year, the company had $1.71 billion in cash, equivalents, and marketable securities on its books at the end of 2019. That's a year and a half's worth of operating expenses (when backing out non-cash stock-based employee compensation) based on last year's figures.  

So I think it's time to pay Pinterest stock some attention. It's trading at an attractive valuation compared to its largest peer; it's approaching a size that allows it to generate positive cash while continuing to spend on growth initiatives; and it has ample liquidity to weather coming economic uncertainty. If you've been patiently waiting for the right time to start scooping up a few shares, like I have been, now looks like the time to start doing so.