Pinterest (NYSE: PINS), a social media website that helps users discover new products and ideas, has seen its stock price rise by about 2x this year, with its market cap standing at roughly $21 billion. The stock now trades at about 14.5x projected 2020 revenues, despite the fact that the company is likely to just about break-even this year. Does this make the stock expensive? Probably not, considering that revenues could grow by close to 2.5x by 2023 if the company continues to execute well, with Net Income (profits after all expenses and taxes) jumping considerably, generating strong returns for shareholders.
For more details on Pinterest’s historical performance, see our interactive dashboard Pinterest Stock Grew 2x Since 2019. Here’s How.
Pinterest’s Revenues could grow by roughly 2.5x from estimated levels of a little over $1.45 billion in 2020 to close to $3.5 billion by 2023, representing a growth rate of roughly 34% per year (for context annual growth was over 55% between 2017 and 2019). There are multiple trends that support this continued growth. Firstly, Pinterest’s user base is soaring, with its monthly active users (MAUs) rising 39% to 416 million over Q2 2020 as the Coronavirus pandemic pushed more people online. Moreover, Pinterest has barely scratched the surface in terms of monetization of its user base, with quarterly ARPU standing at $0.70 globally during Q2, versus over $7 for Facebook.  The content on the Pinterest platform is focused on products, hobbies, and ideas that are more directly related to buying things, compared to other platforms such as Facebook which are focused on sharing personal information. This makes Pinterest more attractive to advertisers. The company has also been improving its technology to drive monetization, launching new tools such as automatic bidding – which makes it easier for advertisers to manage campaigns, and effectively spend more while adding more new shopping-related features for users. Separately, Facebook – which currently dominates the social media landscape – has been facing mounting pressure on anti-trust and privacy-related issues, and this could likely help Pinterest win over more business from more socially-conscious advertisers.
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While we expect Pinterest to just about break even this year, the company could see profits pick up from 2021 onward as its ad revenues pick up sharply post the Coronavirus, and as the company’s past investments in technology and product development start to pay off. While Facebook posted Net Margins (Net income as a percentage of Revenue) of over 25% in the last fiscal year, the company is a dominant force in the ad markets, and it is probably not reasonable to expect similar margins of Pinterest. That being said, as Pinterest’s business gains scale, it should be able to boost margins to levels of around 15% by around 2023. Considering our revenue projections of roughly $3.5 billion and 15% margins, $525 million in Net Income is a real possibility by 2023.
Now if Pinterest’s Revenues expand by 2.5x, the P/S multiple will contract to roughly 0.4x its current level, assuming the stock price stays the same, correct? But that’s exactly what Pinterest investors are betting will not happen! If Revenues expand 2.5x over the next few years, instead of the P/S shrinking from around 14.5x presently to roughly 6x, a scenario where the P/S metric falls more modestly, perhaps to about 11x looks more likely. For context, the broader Internet sector traded at a forward P/S multiple of about 7x, while Facebook trades at roughly 9x.  It’s quite reasonable to assume that Pinterest will trade ahead of these companies considering that it’s likely earlier in the growth cycle, with a lot more scope for monetization. This would make growth in Pinterest stock price by about 80% a real possibility in the next three years, taking its market cap to over $38 billion ($3.5 billion in revenue at an 11x multiple). This would translate into a P/E multiple of about 73x based on our projected 2023 earnings for the company.
Could Snapchat – the multimedia messaging app popular with teens – provide better returns compared to Pinterest over the next 3 years? See our analysis What Will Snap Look Like In 2023? for more details.
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