Pinterest(NYSE: PINS) stock has been on a roller coaster of volatility, hanging on to a 23% rally over the past year, but also down 30% from its 52-week high. Despite a string of strong operating and financial results from the visuals-based social media company, the market appears skeptical about whether the growth momentum can continue.
Let's discuss the key drivers in the outlook for Pinterest and where the stock might be in one year.
Fundamentals supported by profitable growth
With 522 million monthly active users (MAUs) around the world, Pinterest has carved out a leadership position online as the go-to place for brands and creators to showcase image-based content. The platform allowing users to share and "pin" their creative inspirations has resonated particularly among women and a younger age demographic. Ultimately, the core business centers around advertising by offering different visual formats for brands to build awareness or drive product conversion.
In the last reported second quarter (for the period ended June 30), Pinterest revenue climbed by 21% year over year, capturing a 12% increase in global MAUs alongside an 8% higher average revenue per user (ARPU). Management is citing the impact of its investments in artificial intelligence (AI) that enhance its ad-targeting algorithm while also boosting user engagement. Those tailwinds propelled the adjusted earnings per share (EPS) up 38% to $0.29 from the prior-year quarter.
Overall, it was a strong start to the year for Pinterest, even as soft company guidance likely helps explain the recent stock price weakness. For the upcoming third-quarter earnings report (for the period ended Sept. 30) set to be released on Nov. 7, management expects annual revenue growth between 16% and 18%. This target range was seen as a disappointment, compared to the average of published Wall Street estimates at the time, looking for an increase above 18%.
While the market is always looking for signs the business is accelerating, the marginal adjustment to the outlook does not diminish what remains an exceptional growth story.
Pinterest's international growth opportunity
In my view, the attraction of Pinterest as an investment is its differentiated social media model that has proven itself to be highly relevant to a large, growing target audience. Maybe the most positive development this year has been the company's growth internationally, where it is seeing the largest increase in users and revenue. Even as MAUs outside the United States and Canada represent 81% of the platform total, the segment contributes just 21% of company revenues.
For context, compared to the $6.85 in ARPU generated in the U.S. and Canada, Europe only generated $1.03 in ARPU and a meager $0.13 in the rest of the world. That spread highlights the significant opportunity for Pinterest to improve monetization as a long-term growth runway.
source: Pinterest
Partnerships with tech giants including Amazon, allowing users to purchase items directly from ads on Pinterest, along with integration with Alphabet's Google ads manager ecosystem, are seen as in the early stages of expanding the company's global reach.
According to the consensus, Pinterest is forecast to reach $3.6 billion in revenue this year, an increase of 19% over 2023, while the EPS estimate of $1.46 is 34% higher. The runway is expected to extend into 2025, with Wall Street forecasting 17% revenue growth and 22% higher EPS next year.
What I like about the stock today is the sense that shares are on sale following the deep sell-off from its highs earlier this year, which may have been unjustified. Pinterest stock is trading at a forward price-to-earnings ratio of 22 times its full-year consensus EPS, which is well below the ratio of more than 30 it set in June. The valuation multiple looks even more compelling into next year, with a one-year forward P/E ratio of 18.
PINS PE Ratio (Forward) data by YCharts
My Pinterest stock prediction
I believe Pinterest deserves a buy rating, with a good chance the stock will be trading higher by this time next year. Evidence that the company's international strategy is further gaining momentum over the next several quarters could allow earnings to outperform expectations as a catalyst for shares to rally. The stock can work for investors within a diversified portfolio.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Dan Victor has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, and Pinterest. The Motley Fool has a disclosure policy.
