459 Million Reasons Pinterest's Growth Isn't Over Yet

Visual search and social networking company Pinterest (PINS 4.04%) is putting on a clinic in meeting consumer and business needs during the pandemic. On Thursday, the company reported a 76% year-over-year increase in revenue during the fourth quarter of 2020 to $706 million, and adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) skyrocketed 287% year over year to $299 million -- an EBITDA profit margin of 42%.  

After Pinterest's stock price doubled a couple of times over in the last year, the big question now is whether this train has already left the station for good. I say no, and there are 459 million reasons and counting as to why.

Image source: Getty Images.

A huge spike in activity during the holiday shopping season

That's right, 459 million. That's the number of monthly active users Pinterest ended 2020 with. In total, it added over 100 million net active users last year, a 37% increase over 2019.

As an internet platform that earns revenue via advertising sales, 2020 wasn't perfect. Ad sales came to a screeching halt last spring at the beginning of the economic lockdown. However, Pinterest has been focusing on the usefulness of its platform to attract and keep users engaged. And as a result, ad value for marketers is on the rise as the number of eyeballs and amount of activity on Pinterest increases. Average revenue per user (ARPU) went up 12% during the year. Paired with all those new "Pinners," the financial results for full-year 2020 were impressive.  

Data source: Pinterest. EBITDA = earnings before interest, taxes, depreciation, and amortization.   

There was a lot working in Pinterest's favor during the final months of the year, including an extended holiday shopping season (versus a frenzied one crammed into the month between Thanksgiving and Christmas) due to the pandemic. It equated to consumers spending more time pinning ideas, and thus more dollars flowing into digital ads on Pinterest.

But let's not chalk up too much of the company's success to COVID-19. The visual search engine has been investing in new ways to keep people engaged, like with videos. Video stories are also a promising area for creators to engage with their audience. Need some tips on things like wellness, fashion, or design? Or in need of some new home furnishings, a new ensemble before you return to work for the first time, or some play ideas for the kids? Someone on Pinterest has got you covered with a picture or video.  

This visual search and ability to save ideas opens up some interesting use-cases for Pinterest. It's becoming a great indicator of emerging trends since Pinners start searching ideas for projects weeks or even months in advance. For a small business or advertiser looking to plan a marketing campaign or new product design, there's tremendous value here. And relevant ads also make sense for the user experience, so Pinterest is making the addition of new advertisers on its platform a priority. Another priority is more comprehensive ad and conversion insights. After all, keeping users on the platform is only half the battle. It also needs to keep marketing teams coming back, too.  

From negligible earnings to highly profitable platform

The top team at Pinterest promises more details and progress reports on its strategic investments like video and ad usefulness in the year ahead. But all indications point to things moving the right direction. The company estimates revenue will increase in the low 70% range year over year in Q1 2021. Clearly, users and ARPU must still be on the rise.  

And given how revenue growth is equating to dramatic growth for the bottom line, I think this stock is still a good buy -- assuming an investor has at least a couple years (or more) to hold. After all, this is a premium-priced stock at over 30 times 2020 sales as of this writing. And as the company is only just beginning to turn the corner on profitability (as measured by free cash flow), profit-based valuation metrics aren't particularly useful yet. However, as the large adjusted EBITDA margin in Q4 would indicate, Pinterest is well on its way to becoming a highly profitable firm.

E-commerce is here to stay, the digital advertising landscape is evolving, and Pinterest is only just beginning to pay off as it invests in those trends. Oh, and $1.76 billion in cash and equivalents and zero debt doesn't hurt, either. I'm still bullish on Pinterest stock over the next few years and beyond.