Shares of visual search and media platform Pinterest (PINS -1.55%) popped several percentage points on Friday, following a strong fourth-quarter update. Despite the stock's move higher, there's likely still substantial room for this stock to climb even further over the long haul.
Here's a close look at this growth stock, its underlying business momentum, and why you may want to consider adding it to your portfolio.
Image source: Getty Images.
Incredible momentum
Rewind to October and you may recall Pinterest reporting a stellar comeback quarter after a coronavirus-related slowdown in advertising spend in Q2. After growing its revenue just 4% year over year in Q2, Pinterest's top-line growth accelerated to 58% in Q3. Even more, management guided for revenue in the important holiday quarter to climb approximately 60% year over year.
But Pinterest proceeded to over-deliver, growing its fourth-quarter revenue 76% year over year to $706 million.
To put Pinterest's current growth trajectory into perspective. Consider how it differs from Facebook (META -4.13%) and Alphabet (GOOGL -1.23%). The two companies saw their fourth-quarter ad revenue rise 22% and 31%, respectively, in Q4.
Powering Pinterest's business is massive user growth. The company added over 100 million monthly active users (MAUs) in 2020, with total MAUs rising 37% year over year. This compares to Facebook's 14% growth in unique monthly users across all of its social platforms.
Image source: Pinterest.
A reasonable valuation
While it's easy to see why Pinterest is a great business with lots of potential, the same can't be said about the company's stock -- at least not based on a surface-level analysis. Pinterest has a market capitalization of about $50 billion yet is only just now crossing into generally accepted accounting principles (GAAP) profitability. Meanwhile, the company trades at about 30 times sales.
But don't be fooled by these high valuation metrics. Consider the following two insights.
As the company achieves great scale, its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin is expanding rapidly. In Q4 2020, this key profitability metric, which measures adjusted EBITDA earnings as a percentage of sales, was 42%. This was up from just 19% in the year-ago quarter. For the full year, it was 18%, up from 1% in the year-ago quarter. As this profit margin continues to widen, Pinterest will likely see substantially outsized growth in its earnings compared to its top line.
Second, investors should take some time to appreciate the company's newfound accelerated momentum. Not only did Q4 mark a substantial step-up in growth, but management also expects huge growth in the first quarter of 2021, with the company guiding for revenue to increase at a year-over-year rate in the low 70% range -- far ahead of analysts' average forecast for 56.5% growth during the period.
The verdict
So, is now a good time to buy Pinterest stock, despite shares jumping higher on Friday? For investors willing to hold the stock for the long haul, I believe it's not too late to get in on this growth stock.
Of course, there are no guarantees. Among other risks, Pinterest's competition could prove more competent than expected and digital advertising could pose unforeseen challenges. Further, any investors buying the stock today should plan for lots of volatility.
Despite the stock's risks and its recent price appreciation, shares seem like a good long-term bet.
