The image-based social media app Pinterest (PINS -0.52%) thrived at the pandemic onset when billions of people were spending nearly all their time at home. That shift in consumer behavior created a surge in demand for at-home entertainment, and Pinterest benefited as a result.
The opposite is playing out for Pinterest now that economies are reopening. Folks are eager to catch up on activities they missed out on away from home and are now spending less time engaging with the Pinterest app. Pinterest's stock fell by 44.8% in 2021 and has kept falling so far in 2022. Here's why that's an opportunity for long-term investors to buy Pinterest stock.
Image source: Getty Images.
1. A massive market opportunity
As you might already know, Pinterest's app is free to join and use. It makes money from advertisers willing to pay for the privilege of marketing its products and services to people browsing Pinterest. Of course, the more people they can reach, the more marketers are willing to pay. In that regard, Pinterest offers a compelling user base of 444 million monthly active users. That's down by 24 million from the peak two quarters ago but still up by 2 million from the same time last year.
In 2021, the estimated sum spent on advertising was $763 billion globally. That would be a 22.5% increase from the previous year. Economic reopening created an urgency for marketers to get the word out that their businesses were open again. In comparison, Pinterest's 2020 revenue was $1.7 billion. Compared to the overall ad market, its relatively small scale is a massive opportunity.
2. Profitable on the bottom line and cash flow positive
In its fiscal year 2021, Pinterest is making significant strides in profitability and free cash flow. From 2017 to 2020, Pinterest lost over $1.5 billion on the bottom line. In 2021, it was turning the corner on profitability. In the nine months ended Sept. 30, Pinterest has earned $141.7 million in net income. That's up from a loss of $336 million during the same time last year.
The business demonstrates economies of scale as revenue increases while expenses remain relatively grounded. It does not cost Pinterest much more in expenses whether 100 million people use its app or 500 million people.
Expanding profits are boosting cash flow. In the nine months ended Sept. 30, cash flow from operations increased to $541 million, up from a loss of $72 million in the same time the year before. This means Pinterest can be self-sustaining and not need any outside capital to fund the business. It's also cash the company can use for innovative new features and building out its monetization capabilities.
3. Bargain price
Investors have been focused on Pinterest's decreasing number of monthly active users despite the good news on profitability, cash flow, and an expanding market opportunity. Pinterest's stock price crash has it selling at a price-to-free cash flow of 34 and a price-to-earnings ratio of 64.4; each is near the lowest since the company turned positive on those metrics.
Pinterest has a massive market opportunity, and is making great strides in profitability and selling at a bargain price. For those reasons, Pinterest is an excellent stock for long-term investors.
