Pinterest's (NYSE:PINS) stock price nearly quadrupled this year as the pinboard-based social network dazzled investors with its robust growth in revenue and users. But after that massive rally, investors might be wondering if the stock is still worth buying at nearly 20 times next year's sales. Let's delve deeper into Pinterest's strengths and weaknesses to find out.

Understanding Pinterest's niche

Pinterest carved out a niche in the crowded social media market by allowing users to pin any images, videos, and products they find online to a virtual pinboard. The image-based platform is geared toward sharing interests and ideas instead of personal posts and news, which helped Pinterest avoid the hate speech and fake news controversies that have ensnared Facebook (NASDAQ:FB) and Twitter (NYSE:TWTR) in recent years.

Pinterest's iPad app.

Image source: Pinterest.

Pinterest is also a natural platform for promoting products like apparel and household goods. Users can pin and share products with their followers, while companies can advertise and sell them through shoppable pins. Some retailers, including IKEA and smaller merchants using Shopify, have already uploaded their entire catalogs to Pinterest.

Pinterest competes against Facebook's Instagram in the nascent "social shopping" market, but the two platforms generally serve different audiences -- so there should be enough room for both companies to thrive.

How fast is Pinterest growing?

Like other social networks, Pinterest's growth is primarily measured in MAUs (monthly active users), ARPU (average revenue per user), and total revenue. Here's how it fared last year, and throughout the first three quarters of 2020:

Growth (YOY)

FY 2019

Q1 2020

Q2 2020

Q3 2020

MAUs

26%

26%

39%

37%

ARPU

21%

7%

(21%)

15%

Revenue

51%

35%

4%

58%

YOY = Year over year. Source: Pinterest.

Pinterest's ARPU growth decelerated in the first half of 2020 as the pandemic throttled its ad revenue from sponsored pins. Nonetheless, its MAU growth still accelerated in the second quarter as more people stayed home and spent more time pinning content.

That growth continued in the third quarter, as its MAUs rose to 442 million and advertisers ramped up their spending again. During that quarter, Pinterest's MAUs in the U.S. rose 13% year over year to 98 million, while its international MAUs jumped 46% to 343 million.

Pinterest's "Shop the Look" feature.

Image source: Pinterest.

Pinterest's overseas growth is promising, but it generates a lot less revenue from its international users. Its international ARPU rose 15% year over year to $1.03 last quarter, while its U.S. ARPU grew 31% to $3.85.

Pinterest expects its revenue to rise "around 60%" year over year in the fourth quarter. Analysts expect its revenue to rise 43% for the full year, and grow another 42% to $2.3 billion next year.

Based on those estimates, Pinterest's forward price-to-sales ratio of 20 isn't actually that frothy compared to the valuations of other hot tech stocks. Snap (NYSE:SNAP), which is expected to grow its revenue about 42% this year and in fiscal 2021, trades at 22 times next year's sales.

How profitable is Pinterest?

Pinterest's top-line growth is impressive, but it remains unprofitable on a GAAP basis. But its adjusted EBITDA -- which excludes stock-based compensation, interest, taxes, and other variable expenses -- bounced back in the third quarter after some ugly losses in the first half of the year:

Period

FY 2019

Q1 2020

Q2 2020

Q3 2020

Adjusted EBITDA (Millions)

$16.7

($53.3)

($33.9)

$93.0

Growth (YOY)

143%

(39%)

(30%)

2,304%

Adjusted EBITDA Margin

1%

(20%)

(12%)

21%

YOY = Year over year. Source: Pinterest.

Pinterest's adjusted EBITDA in the third quarter offset its losses in the first two quarters, and it will likely finish the year with a positive EBITDA margin.

Wall Street expects Pinterest to generate non-GAAP earnings of $0.29 per share for the full year, up from breakeven earnings in 2019, and for that figure to more than double next year. Based on that forecast, Pinterest's stock trades at 116 times next year's non-GAAP earnings. That P/E ratio might seem high, but it could contract quickly if Pinterest continues to generate double-digit or triple-digit earnings growth.

Is Pinterest still worth buying?

Pinterest's first-mover's advantage in a defensible niche, its insulation from the ethical challenges facing Facebook and other data-driven advertising platforms, and its robust growth rates all make it a worthy long-term investment.

Pinterest's stock isn't cheap, but it also isn't as bubbly as other high-growth tech stocks. I'm still willing to accumulate some shares of Pinterest at its current price -- but I'm also not expecting it to replicate its monstrous gains in 2020 anytime soon.