Pinterest (PINS 2.62%) is having a tough start to 2022. The stock is already down nearly 30% year to date. The image-based social media site benefited when folks were spending more time at home in the early stages of the pandemic.
As economies reopen, demand for at-home entertainment is falling, and Pinterest is one business that is seeing consumer interest decrease. What follows are three reasons that support buying Pinterest stock right now and one reason to hesitate.
1. A massive total addressable market
Pinterest is in the advertising business. Its app is free to use. The company encourages folks to join the site, visit frequently, and spend plenty of time on each visit. Those actions allow Pinterest to show users advertisements -- and there's plenty of room to expand that greatly.
You might be surprised to know that the advertising industry was an estimated $763 billion business in 2021. To put that in perspective, Pinterest generated $2.6 billion of revenue in 2021. So that's a massive opportunity in front of Pinterest. The company has grown its revenue by more than fivefold since 2017; with a huge addressable market, it can potentially keep growing revenue for some time to come.
2. Its users have shopping in mind
Pinterest is a unique social media site in that folks come to it with commercial intent. People are not there to communicate with friends, post pictures, or catch up on the latest news. Instead, the occasions that cause people to visit Pinterest are related to doing something.
For instance, a mother of four may come to Pinterest for an after-school meal recipe -- and so wouldn't that be an excellent occasion for Kraft Heinz to show an advertisement for its macaroni and cheese?
To this end, Pinterest is creating more advertising spots for marketers to reach customers who are looking for inspiration. In this way, advertisements on Pinterest feel like less of an annoyance. A meal suggestion when you're looking for one is less likely to lower the quality of your experience on Pinterest than a car commercial during a ball game will.
Matching advertisements to what folks are searching for can be one advantage in Pinterest's favor in its quest to take a larger share of the advertising market.
3. Pinterest's stock is inexpensive
Pinterest's stock is a lot less expensive than it used to be -- down 30% so far in 2022 and more than 70% from its 52-week high. Such a steep sell-off could be an opportunity for long-term investors.
The valuation is also a lot more attractive now. Pinterest is trading at 23 times free cash flow and 25 times forward earnings; each is near the lowest Pinterest has sold for in its history.
For a company that has grown revenue fivefold since 2017 and has a massive market opportunity ahead, that seems an inexpensive price.
A reason to pause before buying the stock
Still, there may be reason to pause before buying Pinterest's stock. The company has shed monthly active users (MAUs) for three consecutive quarters, falling from 478 million MAUs to 431 million as of Dec. 31, 2021.
At least two trends could cause Pinterest to continue shedding users in the near term. First, economic reopening is gaining momentum, and the less time people spend at home, the more it decreases engagement with Pinterest. Second, Pinterest faces increasing competition from short-form videos, namely TikTok.
Management is allocating resources to build out more short-form videos on Pinterest, but that will take time to develop. In the meantime, Pinterest may continue shedding users, which are the lifeblood of its business. Indeed, Pinterest looks attractive at current prices for long-term investors, but the discounted value also seems justified considering the risk.