Pinterest's (PINS -0.89%) stock recently tumbled after Cleveland Research analyst Chandler Converse claimed the company would post softer-than-expected sales growth in its first-quarter report on Tuesday, April 27. Converse expects Pinterest's growth to decelerate as it faces slower growth in new advertisers, lower spending from those newer clients, and mixed trends from large retailers.

Morgan Stanley analyst Brian Nowak also lowered his stock price target from $95 to $89 in late March, noting that Pinterest's business was strong but its valuation was stretched. Bank of America analyst Justin Post also cited the same challenges and reduced his price target from $94 to $78.

A young woman works on her tablet at home.

Image source: Getty Images.

Yet other analysts still defended Pinterest. Bernstein analyst Mark Shmulik claims ad spending levels on Pinterest remain high and the stock's sell-off represents a "tactical buying opportunity."

Other firms, including Evercore ISI, Loop Capital, and Citi, also remain bullish on Pinterest -- and its average price target still hovers near $90. We should always be skeptical of analysts' estimates, but I'm siding with the bulls for four simple reasons.

1. Pinterest dominates a high-growth niche

Pinterest's users pin photos and videos to virtual pinboards. But unlike Facebook (META -1.38%) -- which mainly runs on personal content, opinions, and conversations -- Pinterest's users usually share ideas for shopping, fashion, cooking, travel, and hobbies with each other.

Shoppable pins on Pinterest.

Image source: Getty Images.

Pinterest is a less toxic and controversial platform than Facebook, which is still struggling to contain hate speech and fake news on its platform. Most of its users are affluent women, and its pinboards represent a natural platform for companies to sell their products.

A whopping 48% of American social media users regularly use Pinterest to find and shop for products, according to Cowen & Company, compared to just 10% on Facebook's Instagram and 4% on Snap's (SNAP 0.78%) Snapchat.

That's why Pinterest is expanding its e-commerce features with shoppable pins, a partnership with Shopify (SHOP 1.80%), shoppable trends, and camera-based searches with its new Lens feature.

Many retailers have already uploaded their entire catalogs to Pinterest, which gives it an early mover's advantage in the nascent social commerce market.

2. Pinterest has robust growth in users and revenue

Pinterest's revenue rose 48% to $1.69 billion in 2020, even as the pandemic temporarily throttled its ad growth in the first half of the year.

Its U.S. revenue rose 39% to $1.43 billion, while its international revenue surged 129% to $268 million. Its growth in monthly active users (MAUs) and average revenue per user (ARPU) also remained robust:

Metric

Result

Year-Over-Year Growth

MAUs (U.S.)

98 million

11%

MAUs (International)

361 million

46%

MAUs (Total)

459 million

37%

ARPU (U.S.)

$15.34

27%

ARPU (International)

$0.88

62%

ARPU (Total)

$4.26

12%

Data source: Pinterest.

Pinterest's overseas growth, led by the U.K., Canada, and Western Europe, should continue as it expands across Latin America and Asia. That expansion should gradually narrow the gap between its U.S. and international ARPU while driving its long-term revenue growth.

Pinterest expects its revenue to rise at least 70% year over year in the first quarter, and analysts expect its revenue to grow 49% for the full year.

3. Pinterest is improving profitability

Pinterest's net loss narrowed from $1.36 billion in 2019 to $128 million in 2020. Its non-GAAP net income, which excludes stock-based compensation expenses, rose nearly 16 times to $283 million. Its adjusted EBITDA surged 18 times to $305 million.

Those bottom-line improvements indicate Pinterest's profitability could continue to improve as it expands its audience and boosts its ARPU with new advertising and e-commerce features. Wall Street expects its non-GAAP earnings to more than double again this year.

4. Pinterest has reasonable valuations compared to high-growth tech stocks

Pinterest's stock might seem pricey at 56 times forward earnings and 18 times this year's sales. However, it's still cheaper than many other high-growth tech stocks.

Snap, for example, trades at nearly 100 times forward earnings and 23 times this year's sales. Shopify -- which holds e-commerce partnerships with Pinterest, Snap, and Facebook -- trades at nearly 230 times forward earnings and 34 times this year's sales.

Pinterest could face near-term pressure as rising bond yields fuel a rotation from growth to value stocks, but it isn't expensive and its long-term outlook remains bright. Therefore, investors should ignore the bearish buzz about slower ad sales and focus on its resilience against Facebook, its growth potential as a social commerce platform, and its ability to expand into fertile overseas markets.