Pinterest's Share Price Is Pricing in Too Much Optimism

The company's near-term prospects are too uncertain to justify its current stock price.
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Pinterest  (PINS) - Get Report recently pulled its full-year guidance, while updating that for its preliminary Q1 2020 results, it has benefited from a strong increase in global users. Even though its stock trades at a significant discount to its IPO price last year, this investment remains expensive given all the near-term uncertainty in the advertising market.

A Very Mixed Business Update

Last week Pinterest updated investors, noting that given our new normal, work-from-home environment, Pinterest has seen its audience size increase significantly ahead of expectations.

Specifically, Pinterest noted that it expects its global monthly active users (MAUs) to reach approximately 366 million, with 90 million in the U.S. and roughly 277 million internationally. Drilling down further, Pinterest’s international figures really stand out.

Pinterest’s international subscriber numbers which had been growing at 5% sequentially from Q3 2019 into Q4 2019, reported a huge bump as its sequential growth into Q1 2020 from its international numbers is expected to grow by more than 12%.

This strong sequential growth, not only shows that more users are adopting Pinterest as their preferred social media platform, but it also reminds investors that Pinterest is doing something right.

On the other hand, Pinterest’s U.S. user growth was more muted. Notwithstanding users spending more time at home, Pinterest’s sequential U.S. user growth in this period reached just 2% compared with 1% sequential user growth from Q3 2019 into Q4 2019. Could this imply that Pinterest has largely saturated its U.S. market?

Further, Pinterest’s average revenue per user (ARPU) in U.S. is $4.00, whereas its international ARPU is just $0.21 as of Q4 2019. This means that one U.S. user is worth 19 times more than an international user.

Hence, the next logical question to ask is whether Pinterest will be able to have more success in monetizing its international users? Indeed, if Pinterest did succeed on this front, given that its international user base is not only growing significantly faster than its U.S. user base but is also already three times bigger than its U.S. audience, this could really boost Pinterest’s underlying potential.

Advertiser Demand Has Taken a Hit

Pinterest generates its revenues from advertising. Consequently, the vitality of the advertising sector has huge implications on Pinterest’s financial performance. On this note, Pinterest states that advertising revenue globally has suffered.

For now, Pinterest declares that the advertising pressure from sectors such as travel, automotive and restaurants have not been significant, but there are certainly questions to be asked, including how long before Pinterest notes a further reduction in revenue from these industries that have been dramatically affected by the coronavirus pandemic.

Valuation - Too Much Downside Potential

The multiple that investors are willing to pay for Pinterest’s stock has contracted from 10.2 times sales in 2019 when it went public to just 6.2 times sales now. Presently, its share price trades at a 30% discount to its IPO this time last year.

Moreover, Pinterest’s business update points to its Q1 2020 revenue growth being up 35% year-over-year. However, when we look at the same period a year ago, Pinterest was growing at 54% year-over-year. Accordingly, we can see a substantial decline in its revenue growth rates taking place over time.

Next, and critical for the near term, investors have to contend with the fact that the advertising industry will be weakened as companies around the world cut back on advertising spend. 

At present, the 6.2x trailing sales that Pinterest is trading at now is expensive, especially if the company is not able to stabilize its revenue growth rates. However, it should be noted that Pinterest has a remarkably strong balance sheet with no debt and $1.7 billion in cash. This will be more than enough for Pinterest to weather the near- and medium-term, giving investors no cause for concern over its financial position.

The Bottom Line

When the economy was strong and the advertising sector particularly robust, Pinterest was struggling to turn a profit. Indeed, the more Pinterest grew its revenues, the bigger its GAAP losses have become. Given its consistent revenue deceleration, together with so much uncertainty facing the advertising sector, this stock is still pricing in too much optimism.