A deeper dive on Pinterest

1) Today, I'm back with a further look at online scrapbook website and app Pinterest (PINS)...

In last Monday's e-mail, at the suggestion of my friend Paul S., I took a first look at the company and its financials. As I concluded:

So based on what I've seen so far, Pinterest is worth a deeper dive...

It has extremely attractive economic characteristics: nice growth, almost no [capital expenditures ("capex")], strong [free cash flow ("FCF")], and an excellent balance sheet. And the valuation doesn't scare me away, as the stock lost a third of its value in the past five months.

So today, I'll do the deeper dive I promised – starting by answering "what the heck is Pinterest?"

Unlike almost every other company I write about, Pinterest is a strange animal, so I want to take a moment to explain it...

It resides at the intersection of social media, search, and e-commerce. In its 2023 Investor Day presentation, the company gave this example of how a user might scan Pinterest's home feed (where it increasingly uses artificial intelligence to deliver compelling content), search for a red dress, and then order one – all within the app:

But as the next slide from the presentation shows, the user's experience often appears disjointed:

And yet, at the end of the day, this weirdness works – as users love and trust Pinterest. Here's how the company put it in the presentation:

This makes me think that Pinterest is likely to remain "sticky" – that there's a real moat around the business that will enable it to grow its users in spite of so much competition from other, larger social media and e-commerce sites.

Let's look at the latest third-quarter earnings, which Pinterest reported on November 7: Year over year, revenue grew a solid 18% thanks to 11% user growth and a 5% increase in average revenue per user.

Meanwhile, despite research and development (R&D) growing by 24% – a good sign that Pinterest is investing in its business – cost of revenue only grew by 9%. At the same time, adjusted earnings before interest, taxes, depreciation, and amortization ("EBITDA") soared by 31% and FCF skyrocketed by 127% to $244 million.

No wonder the company is ramping up its share repurchases, as shown in this chart from last week's e-mail:

And there is certainly a lot of room to grow for a small company like Pinterest, as this slide from its investor presentation shows:

In light of all this, it's easy to see why the analysts at TD Cowen project strong growth for many years to come, writing:

Going forward, we expect Pinterest to be a share gainer in the global digital ad market as we forecast revenue to grow from $3.6 billion in '24E to $6.6 billion in '29E, while we forecast EBITDA margins to expand from 26.9% in '24E to 34.7% in '29E, resulting in an ~19% EBITDA compound annual growth rate from '24E-'29E.

I usually think analysts are wildly overly optimistic in their projections... but in this case, TD Cowen's estimates seem reasonable.

So what's a fair price to pay for a business that can grow profits at nearly 20% over the next five years and that has extremely attractive economic characteristics – including nice growth, almost no capex, strong FCF, and an excellent balance sheet?

I would say somewhere around a market multiple (the S&P 500 Index is currently trading at about 23.1 times forward earnings) – but not much more.

This is a tech company, after all – and it's on the small side. Yes, that means it may have more growth potential... but it also increases the risk that some bigger company turns it into roadkill (though, as noted above, I don't think that's likely).

As of yesterday's close at $30.43 per share, Pinterest has a market cap of about $20.6 billion. Netting out the roughly $2.3 billion in cash means the enterprise value is $18.3 billion. That's equal to 5.2 times trailing revenue of $3.5 billion.

On an adjusted earnings basis, excluding noncash charges (mostly stock-based compensation), analysts expect Pinterest to earn $1.52 per share this year and $1.82 next year... So the stock is trading at 20.0 times this year's estimates and 16.7 times next year's.

Thus, on a forward price-to-earnings-multiple basis, Pinterest today is trading at a roughly 28% discount to the S&P 500.

That's a decent discount... although it's not the 50-cent dollar that I really get excited about.

But here's an interesting twist that a reader, Billy M., flagged. He wrote:

Pinterest's co-founder, Ben Silbermann, stepped down in 2022 and brought in the current CEO Bill Ready – I suspect to prepare the company for sale. Google [owned by Alphabet (GOOGL)] is the most likely suitor.

Under the current Chair of the Federal Trade Commission, Lina Kahn, who has strongly opposed acquisitions, this deal couldn't happen. But under the new Trump administration, she'll likely be gone soon, which means the chances that Pinterest could be acquired, likely at a big premium, have gone up a lot...

I think Billy's conjecture is likely correct... making this an even more intriguing situation.

This stock is definitely interesting enough to ask my analysts to do more work – for example, talking to lots of users to gauge their usage, whether it's increasing or decreasing, if other competitors are emerging, etc.

If we decide it's a buy, subscribers to our Stansberry's Investment Advisory newsletter will be the first to know as always.

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Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.