At $24 per share, Pinterest (PINS +1.32%) stock is trading well below the all-time high of $89.90 it reached in 2021. The company performed spectacularly during the pandemic, with strong growth in revenue and monthly active users, but the reopening of the economy and other headwinds made it difficult to maintain momentum.
Can Pinterest recover its former glory? With a new CEO, it's possible, but it will be challenging. Here's what needs to happen for the stock to hit $100 in 2023.
NYSE: PINS
Key Data Points
Pinterest is showing signs on turning the corner
Pinterest has enough advantages in its corner to deliver better returns to investors. The company likes to tout its unique intersection of search, social media, and commerce, where the latter spells a significant growth opportunity. Former PayPal executive Bill Ready stepped in as CEO in June and is doubling down on investments in machine learning to deliver more relevant Pins and videos to users to improve user engagement, and therefore grow advertising revenue, which is how Pinterest makes money.
Pinterest is showing early signs of turning the corner. After struggling to meaningfully grow monthly active users in the first half of 2022, the company added 12 million users in the third quarter, bringing its monthly active user base to 445 million.
If Pinterest can sustain that momentum through the fourth quarter and into the new year, it's possible the stock could keep climbing. Since Ready joined the company at the end of the second quarter, the stock price is up 35%. That shows optimism for Ready's strategy to accelerate growth.
Advancements in machine learning are improving recommendations, which is crucial to deliver relevant ads to users. Pinterest generates revenue when users click or view ads, which is why it is so important for monthly active users to keep growing. A larger pool of users increases the opportunities to display more ads and generate higher revenue per user.
The additional users in the third quarter helped increase revenue by 8% year over year, slightly down from the 9% in the previous quarter. But the most important takeaway here is that growth is stabilizing after decelerating in the first half of the year.
It's worth noting that Pinterest is growing faster than rival social media platforms right now, which is evidence that it is gaining market share in advertising spending. One analyst sees this momentum continuing in the new year.
Data by YCharts
Piper Sandler analyst Thomas Champion noted in December that the ads on Pinterest's platform tend to lean more heavily into retail and e-commerce than those of social media rival Twitter. Retail is the largest category among advertisers pulling away from Twitter, according to Champion. This situation sets up an opportunity for retail-friendly Pinterest to gain market share.
Will Pinterest stock hit $100?
One big hurdle standing in the way of a $100 share price is valuation. Pinterest currently sells for about 28 times trailing free cash flow. For the stock to reach $100, investors would have to value the company at 4 times that valuation, but that would require a significant acceleration in revenue growth for investors to reward the company with a higher market value.
The consensus analyst estimate has Pinterest accelerating revenue growth to 14% in 2023, but that doesn't justify a steep price-to-free cash flow multiple.
It's not that Pinterest can't grow faster. Over the last three years, the company has reported revenue growth of 51% in 2019, 48% in 2020, and 52% in 2021. A return to that rate of growth would certainly support a higher valuation, but it's unclear if Pinterest can reach that level of growth again, especially as it gets larger with nearly half a billion users on the platform.
While Pinterest is moving in the right direction and should be a good investment for the long haul, it will likely take several years of business growth before the stock reaches $100.
