Is It Too Late to Buy Pinterest Stock?

Pinterest's (PINS 4.04%) stock surged 19% on Oct. 31 after the social media company posted its third-quarter report. Its revenue rose 11% year over year to $763 million and exceeded analysts' expectations by $20 million. It generated a net profit of $7 million, compared to a net loss of $65 million a year earlier, as its net profit of a penny per share cleared the consensus forecast by $0.04.

Pinterest's headline numbers were impressive, but is it too late to buy its stock after its post-earnings rally? Let's review its growth rates and valuations to decide.

Image source: Pinterest.

Pinterest's growth is accelerating again

Pinterest grew like a weed during the pandemic as people stayed at home and spent more time searching for online shopping ideas, recipes, DIY projects, and family activities on its virtual pinboards. But that growth spurt set it up for tough year-over-year comparisons after the pandemic lockdowns passed, and the macro headwinds prolonged that pain by throttling the growth of the broader advertising market. It also faced stiff competition from ByteDance's TikTok and Meta Platforms' Instagram.

Pinterest's revenue rose 48% in 2020 and 52% in 2021, but grew a mere 9% in 2022. Its monthly active users (MAUs) had also dropped to 450 million by the end of 2022, compared to its pandemic-era peak of 478 million MAUs in the first quarter of 2021. That slowdown convinced many bears that Pinterest was merely a passing fad, and its stock plunged from its all-time high of $89.15 on Feb. 16, 2021, to about $18 last June.

But over the past year, Pinterest's growth in monthly active users (MAUs) accelerated again -- and it finally set a new high of 482 million MAUs in the third quarter. Its average revenue per user (ARPU) also grew for the first time in three quarters, which drove its growth in total revenue to accelerate for the third consecutive quarter.

Data source: Pinterest. YOY = Year over year.

Pinterest expects that acceleration to continue with 11% to 13% year-over-year revenue growth in the fourth quarter. It mainly attributes that growth to its overseas expansion, new AI-driven recommendations, fresh video content, the integration of more e-commerce features into its platform and an influx of Gen Z users, which is reducing its dependence on older millennial and Gen X users. The broader stabilization of the advertising market -- which was reflected in Meta's and Snap's latest earnings reports -- is likely amplifying that growth. 

Pinterest's pinboards make it a natural platform for companies to visually advertise their products, and its partnerships with Amazon and Shopify are transforming it into a social storefront with shoppable pins. Those unique strengths -- along with its lower exposure to misinformation, hate speech, and other controversial content -- could be widening Pinterest's moat against Meta, Snap's Snapchat, X, and other leading social media companies.

During the conference call, CEO Bill Ready reiterated Pinterest's goal of growing its annual revenue at a compound annual growth rate (CAGR) in the "mid to high-teens" over the next three to five years. Analysts expect Pinterest's revenue to grow at a CAGR of 14% from 2022 to 2025.

Pinterest's margins are expanding again

Pinterest's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin expanded from 18% in 2020 to 32% in 2021, but shrank to 16% in 2022. That figure dropped to 4% in the first quarter of 2023 -- even after it implemented two rounds of layoffs and executed other cost-cutting measures -- but expanded sequentially and year over year to 15% in the second quarter.

In the third quarter, its adjusted EBITDA margin expanded again to 24%. During the conference call, Bill Ready reiterated Pinterest's long-term goal for expanding its adjusted EBITDA margin to "the low 30% range in the next three to five years." Wall Street expects Pinterest's adjusted EBITDA to grow at a CAGR of 37% from 2022 to 2025, which would give it an adjusted EBITDA margin of 27% by the final year.

Is it too late to buy Pinterest's stock?

Pinterest's stock has risen more than 20% this year, but it remains nearly 70% below its all-time high from February 2021. It also still looks reasonably valued at 5 times next year's sales and 20 times its adjusted EBITDA. But it looks a bit pricier than Meta, which trades at 5 times next year's sales and just 8 times its adjusted EBITDA.

That said, Pinterest could still have room to grow as a dual play on the social media and social commerce markets. It's silenced the bears who claimed it was a fad, and it continues to grow in the shadow of TikTok and Instagram. Therefore, I don't think it's too late to buy Pinterest's stock even if you missed its latest post-earnings pop.