Image-browsing platform Pinterest (PINS 0.05%) appointed new CEO Bill Ready one year ago. And on Sept. 19, Bill was ready to lay out some concrete financial targets for the next three to five years -- targets that have big implications for shareholders.
Pinterest's management team believes that five years from now, the business could be generating around $6 billion in annual revenue, and earnings before interest, taxes, depreciation, and amortization (EBITDA) could reach $1.8 billion. If those numbers are accurate, Pinterest stock could feasibly double in value over the next five years.
Here's how the company plans to get there and how the stock could double.
The five-year plan
Pinterest just hosted an investor day event, a presentation that's oriented toward the company's long-term vision. Starting with the top line, management believes the company can grow revenue by a mid- to high-teen percentage annually. For the sake of argument, let's say it's 15%. According to the Rule of 72, Pinterest's revenue would double in five years at that rate.
NYSE: PINS
Key Data Points
That's an ambitious goal. Consider that Pinterest's revenue in the most recent quarter was only up 6% year over year. Sustaining 15% or more annualized growth over the long term won't be easy.
Yet Pinterest does have a promising path. In recent quarters, the company's active user base had been shrinking. But in Q2, monthly active users jumped 8% year over year to 465 million.
Pinterest's management believes it can sustain this growth in active users. Right now, it's particularly winning among Generation Z. Gen Z users were up 20% year over year during the quarter and now account for 42% of total users. And as it turns out, Gen Z users are more engaged with the Pinterest platform than other demographics are, saving posts more frequently.
In other words, Pinterest hopes that both its user base and user engagement can grow for years to come. Again, it won't be easy, but things are trending in the right direction. And accomplishing these two things would allow the business to generate more revenue because it can display more ads.
Additionally, Pinterest hopes it can increase its ad rates to generate more revenue per ad. With site visitors saving more things on the platform, driven by Gen Z users, the company has more data to work with for improving targeted ads. If it can demonstrate improved ad performance, it can demand higher rates.
In summary, Pinterest hopes to grow its user base, grow engagement, and increase ad rates. These three things will drive that approximately 15% annual top-line growth it's hoping for.
What about profits?
When it comes to profits, Pinterest's management is providing adjusted EBITDA guidance. This profitability metric comes with several disclaimers, so take it with a grain of salt. That said, company leaders believe Pinterest's adjusted EBITDA margin could reach 30% to 34% within the next three to five years.
In Q2, Pinterest's adjusted EBITDA margin was just 15%, and that figure was only 14% over the past year. Therefore, achieving at least a 30% margin appears ambitious on the surface. But if we look more closely, this appears to be a realistic goal.
Consider that Pinterest had a 32% adjusted EBITDA margin in full-year 2021. The number has been north of 30% before, which suggests the company can do it again.
Part of Pinterest's improved profitability will come from opening its ad network to third parties. For instance, earlier this year, Pinterest opened its ad network to third parties for the first time via its Amazon partnership. Amazon merchants who pay for sponsored ads could now have ads show up on Pinterest as well as on Amazon.
The benefits for Pinterest are twofold.
- Opening its platform to third-party ads creates more demand for ad slots, which could potentially boost rates.
- Pinterest doesn't have to spend money to attract these small and medium-sized merchants on Amazon -- they're automatically opted in when they buy sponsored ads on Amazon's platform.
In other words, this move could help Pinterest boost revenue while reducing expenses, which will help support its 30% to 34% adjusted EBITDA margin goal.
Adding it all up
If Pinterest can double its revenue and achieve a 30% adjusted EBITDA margin, then it could be looking at $1.8 billion in adjusted EBITDA in five years.
Pinterest stock currently has an enterprise value of $15 billion. Therefore, to double, it would need an enterprise value of $30 billion. Assuming it achieves $1.8 billion in adjusted EBITDA, it would need to be valued at least at 17 times this profit to reach an enterprise value of $30 billion.
For what it's worth, an enterprise-value-to-adjusted-EBITDA valuation of 17 is reasonable and far cheaper than its valuation today. If management executes on its plans, Pinterest is an attractive value now as shares could handily outperform the broad market.
