Bristol-Myers Squibb (BMY -8.51%) and Pinterest (PINS -0.64%) delivered returns of 1% and 250%, respectively, in 2020. Although the share price performance could not be more different, the long-term fundamentals of both companies are very strong.
Bristol-Myers Squibb is a big pharma company with a drug portfolio and research pipeline more akin to a high-growth biotech. Pinterest, on the other hand, is revolutionizing the social media space. Both stocks have a high growth potential in 2021.
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1. Bristol-Myers Squibb
The year 2020 was not kind to Bristol-Myers Squibb. The COVID-19 pandemic affected sales of the company's drugs, as fewer patients could access doctors' offices, hospitals, and infusion centers. The market is also concerned about the loss of exclusivity (LOE) for blockbuster drugs such as blood cancer drug Revlimid in 2022, immuno-oncology drug Opdivo in 2028, and blood thinner Eliquis in 2026.
The positives, however, are outweighing the negatives for this diversified big pharma company. Bristol-Myers Squibb has guided for annual low to mid-single-digit annual average growth rate in revenue, and low to mid-40s operating margin from 2020 to 2025. In contrast, the company's revenues rose at a 9.6% annual CAGR, while annual operating margins remained in the 20s range, from 2015 to 2019. The company is working for significant margin expansion by launching high-margin products and improving cost efficiency. By 2025, the company expects its new product launches to account for almost 27% of the total revenues. The company has also estimated the non-risk adjusted revenue potential of its recent product launches and late-stage pipeline assets to be $20 billion to $25 billion by 2029, which will offset much of the negative impact of the upcoming patent expiries of its core brands.
Revenues of Opdivo, Revlimid, and Eliquis have been trending upwards throughout 2020. Recently launched drugs such as Reblozyl and Zeposia are also gaining steam. Additionally, there are several upcoming regulatory catalysts for the company. Prominent among them are potential U.S. Food and Drug Administration approvals for ide-cel in multiple myeloma indication by March 27, and for mavacamten in obstructive hypertrophic cardiomyopathy in the first quarter of 2021.
Bristol-Myers Squibb is trading at a forward price-to-earnings (P/E) multiple of only 8.6, which is below its historic valuation as well as those of most other big pharma players. There remains significant scope for multiple expansion, once the market realizes that the company is well-prepared to face the upcoming patent cliff. On top of that, it sports a dividend yield over 3%, history of increasing dividends for 11 consecutive years, and has now increased the total amount authorized for share repurchases by $2 billion to $6.4 billion.
The company had a solid cash balance of $22 billion at the end of the third quarter, and expects to generate free cash flows of $45 billion to $50 billion from 2021 to 2023. This cash-rich company is also focused on rapidly deleveraging its balance sheet and then using the increased balance sheet flexibility for mid-sized bolt-on deals.
Based on its solid fundamentals, targeted growth strategy, and attractive risk-reward proposition, healthcare investors should be making a go for Bristol-Myers Squibb in 2021.
2. Pinterest
Social media company Pinterest was one of the big winners in 2020. Members use the platform to discover inspiration and ideas for a range of activities and hobbies. The company focuses on providing visual recommendations based on photographs, infographics, videos, and other rich content created by other users. Pinterest earns revenue by advertising to the right people at the right time, which makes advertisements feel more like relevant content.
Pinterest has witnessed a dramatic expansion in both membership and overall user engagement in 2020. In the third quarter, Pinterest reported a 37% year-over-year rise in monthly active users (MAUs) to 442 million. Average revenue per user (ARPU) was up year over year by 15%, to $1.03. With people spending more time at home and stay-at-home measures accelerating the pace of e-commerce adoption, companies began allocating more of their advertising budgets to online channels instead of traditional media platforms. And this change in advertiser behavior is now here to stay. Mordor Intelligence expects the online advertising market to grow at an average annual growth rate of 21.6%, from $304 billion in 2020 to $983 billion in 2025.
Pinterest has also benefited from the temporary advertising boycott faced by Facebook (META -10.56%), in response to its alleged role in spreading political misinformation and hate speech. Small and medium-sized businesses (SMBs) are increasingly moving their advertising budgets from Facebook to alternate platforms like Pinterest or Snap (SNAP 2.89%), after being dissatisfied with the company's technical and customer service capabilities.
To leverage the opportunity, Pinterest is investing extensively in automation technology to easily onboard SMBs and optimize their advertising campaigns. It's also deploying tools to make it easier to search and then purchase products on its platform. Approximately 89% of people on the platform use it for inspiration to make purchases. The high commercial intent of this user base is driving more and more businesses to advertise on Pinterest.
In third quarter, Pinterest's total revenues jumped 58% year over year to $443 million, while international market revenue grew at a much faster year-over-year rate of 145%. Pinterest also reported a very healthy adjusted EBITDA margin of 21%, and is now guiding for fourth-quarter year-over-year revenue growth of 60%.
Trading at a price-to-sales ratio of 31, Pinterest is not a cheap stock. However, with a rapidly expanding and engaged customer base, an effectively targeted advertising strategy, a potentially huge international market, and a clean brand image, the company has a big opportunity ahead to monetize the content on its platform. The stock is well-positioned to be a solid success story in 2021.
