Is Pinterest a Buy?

The stock market just doesn't have much use for tech growth stocks right now, let alone those that were big winners during the lockdown phase of the pandemic. Pinterest (NYSE: PINS) has suffered one of the biggest declines among those stocks, with shares down more than 68% from their 52-week high.

When everyone was locked in their home with nothing to do, looking up remodeling ideas or craft projects on Pinterest was de rigueur for anyone wanting to maintain their sanity. Now with lockdowns a thing of the past, and the market cycling away from the tech sector to more consumer goods plays (though these days the entire market is down), the creative idea collating site is pretty much an afterthought.

That could represent an opportunity, though, if Pinterest still has any growth potential. Let's see if the internet's pin board is worth an investor's time.

Woman putting up sticky notes on glass wall

Image source: Getty Images.

A place for everything

Pinterest isn't your typical social media stock, though it's based on the power of crowds just like Meta Platforms and Twitter. But rather than trying to connect everyone individually, Pinterest looks to tap into their ideas and let users benefit from the experiences of others.

Whether someone wants to lose weight, find food to cook, get inspiration for redecorating, or whatever one's life ambitions are, others have also had that goal. Pinterest allows users to "pin" the collective suggestion on the site for easy callback later.

It's easy to see why hundreds of millions of people flock to the site every month. At the end of the third quarter Pinterest reported 444 million active monthly users, up 1% from the year-ago period. And therein lies part of the reason its stock is down so sharply.

Pinterest admits the headwinds from competition from out-of-home activities has been too much to surmount. Although MAUs are up year-over-year, they're down 2% sequentially from when it had 454 million MAUs, and down from their peak of 459 million at the end of 2020.

Pinterest says it's also facing issues from kids going back to in-person learnings at school and from Google changing its algorithm (again), which led to lower search traffic. As a result, Pinterest saw U.S. mobile app MAUs decline by low-single-digit percentages from last year, though international mobile app MAUs grew by double-digit rates.

Unfortunately, the U.S. accounts for 79% of total revenue, so while seeing Pinterest's international markets grow is encouraging, it's not nearly enough to offset the steep drop in U.S. engagement. Where Pinterest realizes average revenue per user (ARPU) of $5.55 in the U.S., ARPU is a minuscule $0.38 internationally.

Pinterest website on tablet PC

Image source: Pinterest.

New growth opportunities

So Pinterest is pretty much a no-fly zone then, right? Not at all! In fact, Pinterest could be one of the big winners for investors in the years to come.

First, because the international market is so small right now, it represents enormous opportunity. The U.S. is not exactly a mature market for pinning, but it is an overrepresented one, so seeing gigantic gains in monthly users is always going to be difficult, barring a return to lockdowns again. Not so for foreign markets.

The 43% jump in revenue in the quarter to $633 million was primarily a result of expansion into those new markets, and it actually represents the lion's share of its MAUs. Where there are 89 million MAUs in the U.S., Pinterest has 356 million MAUs in foreign lands, up 4% year-over-year, though they're spread across numerous countries.

Moreover, Pinterest is perfectly aligned with e-commerce, and shopping through the site was another significant contributing factor to third-quarter revenue growth. Users on Pinterest are primed to buy. They're looking for ideas they can spend their money on.

Pinterest has been working diligently to make its site more shoppable, and it's attracting advertisers to the platform by retooling it to cater to mid-market and small- and medium-sized businesses. It should become a magnet for companies looking to target consumers wanting to buy.

By also ensuring that its international site can also benefit from the upgrades, any increase in ARPU will flow right to Pinterest's bottom line.

A discounted darling

Wall Street forecasts Pinterest will grow earnings per share at a staggering 56% annually for the next five years, so even though the stock trades at 52 times earnings, it's actually at a discount to what analysts think it will be doing in the future. By the middle of the decade, revenue is expected to surge 3.5 times from the $1.69 billion it reported last year to $5.87 billion.

Pinterest stock is also expected to grow based on those calculations, with analysts setting a one-year consensus price target of $65 per share, or 129% above where it currently trades. Now that doesn't bring the stock back to its all time high of $90, but there are many more years into the future for this to play out.

Pinterest is a former high-flying growth stock that should be considered a buy, and a good choice to pin in the long-term portion of your portfolio.

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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns and recommends Meta Platforms, Inc., Pinterest, and Twitter. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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