Pinterest (PINS 2.37%) investors got a rare piece of good news on Thursday evening when The Wall Street Journal reported that activist investor Elliott Management has accumulated a 9% stake in the social media company.
Shares of Pinterest jumped 16% on the news on Friday, showing investors are hungry for a positive catalyst after the stock fell roughly 75% from its peak last year. Helmed by billionaire Paul Singer, Elliott is known for its aggressive tactics in its tech investments. For example, it pushed for Jack Dorsey's resignation as CEO of Twitter and successfully urged eBay to spin off its Stubhub and Classified businesses.
Pinterest just named a new CEO with co-Founder Ben Silbermann moving to the Executive Chairman. The company is bringing in Bill Ready as CEO, who previously led Alphabet's e-commerce and payments business.
That move shows Pinterest doubling down on a strategy it's already talked about repeatedly on earnings calls: building an e-commerce business to complement its core advertising model.
Elliott has held discussions with Pinterest over the last several weeks as it's built its stake in the company, though it's unclear what the two parties have discussed.
Pinterest, which serves as an image-discovery engine allowing users to post or search images to help with projects like children's activities, wedding planning, or home improvement, is a unique property in social media. With nearly 500 million monthly active users, the business would appear to have significant potential.
However, investors have soured on the company as its user base declined last year as the pandemic boom faded and some of its new users returned to real-world activities. At the same time, the company's once sky-high revenue growth has returned to earth, with the top line growing 18% to $575 million in the first quarter. Second-quarter guidance called for just an 11% revenue increase.
With its stake in Pinterest now worth more than $1 billion, Elliott clearly sees an opportunity in Pinterest. Should you follow the activist investor into the struggling social media stock?
The good news
While the market may have bailed on the image-sharing site, there are a number of reasons to like Pinterest stock right now, especially at the current price.
First, the user decline is over, though year-over-year figures are still falling. In the first quarter, the company recorded 433 million MAUs, which was down 9% from Q1 2021 but a slight improvement from the 431 million MAUs it had in Q4 2021. That's a sign that the hangover from the pandemic boom is fading and the company's user base should return to steady growth.
Unlike a number of tech sector growth stocks, Pinterest is also profitable. It finished 2021 with $814.3 million in adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization), or a 32% margin. Even on a GAAP (generally accepted accounting principles) basis, the company brought in $318 million in net income, or $0.46 per share. Profit margins are expected to shrink this year as top-line growth slows and the company invests in areas like native content, Pinner experience, and shopping, but that's no cause for alarm.
As Pinterest and its peers have demonstrated time and time again, digital advertising is a high-margin business at scale.
The pandemic was something of a white elephant for Pinterest and other tech stocks. Performance boomed during the social distancing period, but now that that surge has disappeared, the market's perception of the business is broken, and it's unclear whether Pinterest can deliver strong organic growth again or if the company was just the beneficiary of a once-in-a-lifetime pandemic.
While being a unique business has its advantages, it also means Pinterest's business model is unproven, and there is some evidence that the company struggles to convert new users into frequent users. Unlike sites like Facebook or Snapchat, users don't come to Pinterest to connect with friends, so the impetus to visit the site regularly is based strictly on need or a specific use case rather than a social connection. Compared to its social media peers, that appears to be a weakness.
Should you buy Pinterest?
On balance, the pros seem to outweigh the cons here. In particular, Pinterest looks oversold as the sell-off is primarily due to temporary conditions. For example, the decline in users has since ended, consumer behavior is shifting back to real-world activities, there is a slowdown in advertising due to Apple's privacy changes, and fears of a recession weigh on business investments.
The stock is down because of those temporary conditions, but the core value proposition of Pinterest is still clear. It attracts more than 400 million users at least once a month, and it delivers an experience they can't get anywhere else. The platform is also especially valuable to advertisers because, unlike other social media sites, users want to see ads. Often, they come to the site with a purchase intent, something that doesn't happen with Facebook or Instagram.
That quality is what gives Pinterest so much potential to an investor like Elliott and why it makes so much sense for the company to invest in e-commerce. Selling directly on the site seems like a no-brainer, and if the company can make it work, the stock should be in a much better place five years from now.
At the current price, the downside to owning Pinterest seems limited. And with a market cap of just $13 billion and the explosive potential of e-commerce, the upside could easily lead to long-term gains of 5x or even 10x.