Pinterest: Easy Comps Ahead (NYSE:PINS)

As with most tech stocks, Pinterest (NYSE:PINS) faced a volatile few years due to Covid lockdowns and the following reopening. The boom and bust environment has left most stocks in the social media space in the bust segment now providing easy comps to top in 2023. My investment thesis remains ultra Bullish on Pinterest heading into the new year as users start to grow again.

2023 Rebound

A big part of the rally in 2021 was the easy comps from mid-2020 due to the initial ad slowdown due to Covid lockdowns. The downside was that Pinterest entered 2022 with very tough comps to hurdle along with a more difficult economic environment leading to the last quarter only generating 8% revenue growth.

All Pinterest needs is a return to more consistent 20% growth rates in order for the stock to quickly become appealing. The company only trades at 5x current 2023 revenue estimates of $3.23 billion.

Pinterest was highly profitable in 2021 before shifting to focus on improving monetization of the business. The company produced an impressive adjusted EBITDA of $814 million for a 32% margin. The social imaging company even had an 18% margin in 2020, though this EBITDA was entirely from a very strong Q4 after the Covid slowdown.

Pinterest actually produced an EBITDA of $77 million in the last quarter and has seen net cash provided by operating activities reach $411 million YTD. The amazing part is that the company has $2.7 billion in cash for a stock with a market cap of only $15.5 billion.

The social imaging company might struggle to repeat the leverage produced in the unstoppable growth of 2021, but Pinterest only trades at 20x those adjusted EBITDA levels.

As with most tech companies, Pinterest boosted all expenses during the last four quarters with R&D and S&M expenses up ~6 percentage points as a percentage of revenues. In a similar manner, the costs of revenues surged from 20% to 26%.

With the new CEO, Pinterest has a lot of plans to expand into social commerce suggesting higher expenses. The layoffs at most competitors in the social space should allow the company to quickly boost adjusted EBITDA margins back towards the 30% levels from only 11% in the last quarter.

The social commerce market is forecast to jump from $36.6 billion last year to $79.6 billion in 2025. The share of total e-commerce sales will only reach 5.2% in 2025, up just minimally from 4.0% in 2021.

If done correctly, Pinterest has the potential to play a big role in turning the images on the platform into e-commerce sales for partners.

Return To User Growth

Most social media stocks ultimately trade in the path of the user totals. Pinterest saw a user spike in late 2020 and the stock surged to a high of nearly $90 before the collapse below $20 on user declines.

The company has now seen MAUs (monthly active users) rebound for three straight quarters. The MAUs bottomed at 431 million in Q4’21 and has seen solid sequential growth to 445 million in Q3’22.

Pinterest added an impressive 12 million users sequentially in Q3, but the market is only looking at flat growth YoY in global users. The Q4’22 numbers will be the first where the company shows YoY growth with just flat sequential MAUs at 445 million leading to 3% growth.

Of course, every 4 million additional MAUs boosts YoY growth by one percentage points. At just 5% user growth, Pinterest needs limited 10% ARPU growth (reached 11% in Q3) in order to push annual revenue growth back towards 20% providing a primary example of how user growth is so crucial to the stock besides just the network effect.

The market wants profitable growth and Pinterest should provide this in spades during 2023. Investors should look for the social imaging company to shake off the slow growth rates of 2022 and end up pushing the 15% revenue growth in 2023 back towards 20%.

Takeaway

The key investor takeaway is that Pinterest is appealing at the recent lows. The stock trades at an EV/S multiple closer to 4x and a return to user growth provides a boost to ride ARPU growth much higher. The market doesn’t like the social media space, but Pinterest keeps trending higher in a bullish sign.