Investors' appetite for Pinterest (PINS) has been strong since it went public at $19 in April. Pinterest has strong underlying momentum, which has recently attracted some sell-side recommendations. However, given the super high expectations already baked into its share price, investors are better off avoiding this name.
Business Differentiator - Not A Social Platform
Pinterest does not wish to be labeled as a social media platform, nor be recognized for providing online entertainment. Pinterest is more of a place to get inspired, for users to plan their dreams and seek out visual recommendations. For instance, Pinterest has two particularly strong verticals, home décor and fashion. However, Pinterest is continuously adding new verticals, having recently added finance and travel.
Another significant differentiator for Pinterest is how ads are not perceived by the user as obstructive or invasive. On the contrary, they are aligned with its users. The purpose of advertising on the site is to help users be productive, get new ideas and bring their plans to life.
The Video Opportunity
Given that Pinterest is primarily a visual experience, it only makes sense to build up its video capabilities. Furthermore, Pinterest's CFO Todd Morgenfeld describes how video is resonating strongly with advertisers. He has explained that video can be used to grow user engagement, increase the length of time users spend on the platform and to promote content.
Pinterest currently faces a balancing act. From a capital perspective, pushing video content is very expensive. On the other hand, Pinterest's management believes this opportunity is extremely positive and is already a strong contributor to Pinterest's revenue. Furthermore, despite being a relatively new medium for Pinterest, video advertising is picking up solid momentum with advertisers and was up 3x year-over-year in the first quarter of 2019. More potential from video is expected to be unlocked in 2020.
Pinterest certainly has strong and stable revenue growth.
What's more is that unlike many of the IPOs investors have seen in 2019, such as Uber (UBER) , Pinterest's revenue growth does not appear to be fizzling out. In fact, Pinterest's outlook for fiscal 2020 is still pointing towards 41% year-over-year.
Also, Pinterest's revenue is being driven not only by a large increase in the total number of global users, which was up 54% year-over-year, but also through rising ARPU (average revenue per user). Pinterest's ARPU was up 41% in the U.S. and 59% internationally.
Pinterest's top-line growth is also improving its adjusted EBITDA numbers. At the end of 2016, Pinterest's adjusted EBITDA figures was negative $132 million. Then, for 2016, this figure improved and was negative $39 million. However, on the back of the robust revenue growth expected this year, Pinterest mid-point adjusted EBITDA is reversing its trajectory and is expected to come in somewhere near negative $55 million.
A High Price Tag
Here is the issue at hand. If investors believe that Pinterest can flawlessly execute against its sky-high valuation, then they might be rewarded, given that Pinterest's top line appears to be strong and sustainable, with a compounded annual growth rate north of 35%.
However, for Pinterest to continue to impress investors, given that investors have already set the bar so high it be a challenge. Presently, its stock is valued at more than 18x revenue, and Pinterest has no history of making profits or cash flows. This means that Pinterest amounts to very expensive speculation without much in the way of upside potential left.
The Bottom Line
Pinterest is a young business with a very compelling business model. Its key opportunity may be that it doesn't have to compete head-to-head with Facebook (FB - Get Report) , a battle it would probably lose.
There is no doubt, however, that the stock is richly valued. And given that it has no history of making a profit, investors may be being seduced by its rapidly growing revenue. In the event that Pinterest badly misses for a quarter, its stock would likely be severely punished.