Once a high-flying growth stock driven by pandemic tailwinds, Pinterest (PINS -0.82%) has been beaten down more than 60% over the last year. Wall Street has focused on one falling metric and has thrown out the stock because of it.
I believe many investors are missing the larger Pinterest picture, and today's prices represent a portfolio-changing investment opportunity. After all, it's not often that you can find a growth stock trading near value prices.
Image source: Getty Images.
Pinterest's platform is attractive to advertisers
The Pinterest platform is where its users go for ideas and inspiration before embarking on a project. For example, someone could search "kitchen remodel" and the feed would return several pictures, videos, and links of remodels done by others. This concept can be applied to weddings, recipes, and practically anything else. Chances are if you have an idea, someone on Pinterest has done something similar.
Because users search around Pinterest when they are looking to take action on an idea, it makes the platform an advertisers' gold mine. Re-using the kitchen remodel example, Home Depot or Lowe's could advertise its product and also include "how-to" videos on the feed.
The e-commerce giant Shopify (SHOP -2.76%) has also teamed up with Pinterest. Its plug-in allows its clients' shops to upload their catalogs into Pinterest's feed results. After doing so, a store that sells decorations could expect its kitchen lineup to appear in the "kitchen remodel" search feed.
Pinterest is constantly trying out new ideas to promote its platform. In October, it launched Pinterest TV, which includes shows about DIY projects, home, food, and beauty. Users can also use augmented reality (AR) technology to see how products like makeup will look on them before making the purchase.
Strong quarterly results, with one caveat
Contrary to what the stock's trajectory would have investors believe, Pinterest's third-quarter earnings results were strong. Its revenue grew 43% over last year to $633 million and even generated a $94 million profit. Breaking down the revenue streams, U.S. and international grew 33% and 96% respectively. Its margins are also impressive for a growing tech company.
| Pinterest Margins | ||
|---|---|---|
| Gross Margin | Adjusted EBITDA Margin* | Net Profit Margin |
| 80% | 32% | 15% |
Data source: Pinterest. *Adjusted EBITDA Margin adds back stock-based compensation. Where many investors criticized Pinterest is its monthly active users (MAU) statistic. This metric only increased 4% for international users and actually decreased 10% domestically. Once this shrinkage was reported, few bothered looking at any other results. To them, Pinterest must be growing its user count to be considered a good investment.
However, a logical investor should expect some slowdown, as these numbers were being compared to pandemic-era results. Some users will likely never log on ever again, and that is OK. Pinterest is rapidly monetizing the remaining users. This success is captured by its average revenue per user (ARPU) metric.
| Metric | Global | U.S. | International |
|---|---|---|---|
| ARPU | $1.41 | $5.55 | $0.38 |
| Year-over-year growth | 37% | 44% | 81% |
Data source: Pinterest.
Obviously, if Pinterest continues losing MAUs throughout 2022 and beyond it is concerning. However, even if that number stabilizes to zero or low growth, the rising ARPU statistic will drive growth.
Comparing it to Meta Platforms (META -1.10%), Pinterest has a long way to go before achieving peak ARPU numbers. In Q3, Meta's U.S. ARPU was $52.34, nearly 10 times as much as Pinterest. While Pinterest won't be reaching that level soon, it shows how there is plenty of room to grow its user monetization.
Trading at value prices?
Pinterest's current price-to-earnings (PE) ratio is expensive at 67, yet Pinterest's forward PE is a mere 24, making it cheaper than other stocks widely considered to be more value-oriented investments.
PINS PE Ratio (Forward) data by YChartsForward earnings utilize analyst and company projections, making them far from perfect. However, they're still a useful tool when considering today's prices in relation to future earnings. Regardless, it's rare to see a company growing revenue at a 40%-plus pace and having a forward PE ratio around 25. At this valuation, I believe Pinterest could be considered a "value-growth" play.
True value investors would probably scoff at purchasing a stock with a PE ratio of more than 20. But growth investors looking to balance their high valuation stocks with lower multiple growers should consider Pinterest.
Investors have a lot to watch during its fourth-quarter earnings report, likely occurring in late January or early February. Specifically, I will be watching its MAU and ARPU growth rate and profit margin. If MAUs tick up and ARPU growth remains high, I'd expect the stock price to rise. Additionally, I'd like the profit margin to maintain its level -- that way I can ensure management isn't just buying growth to please investors.
At these prices, Pinterest doesn't have too much more room to fall, but anything can happen. I believe now presents a great time to add to Pinterest or open a new position before its earnings report. However, those who cannot stomach the volatility should stay away, as Pinterest stock ownership is far from a smooth ride.
