Pinterest Stock: 15% Net Cash, 20% Growth, 20x Earnings (NYSE: PINS)

Pinterest Leaders

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It is not easy transitioning from a high-growth pandemic winner to being a post-pandemic value stock. Pinterest (PINS) has seen its stock fall so much that it is now trading below pre-pandemic levels. The company generates ample free cash flow, has 15% of net cash on the balance sheet, and trades at 20x trailing non-GAAP earnings. The company is continuing to make progress in becoming an app where consumers can discover shopping ideas and make the purchase as well. I rate the stock a strong buy primarily based on the strong free cash flow generation, which should help the stock earn a higher multiple.

PINS Stock Price

After falling over 70% from its peaks, PINS is now trading below pre-pandemic levels.

PINS stock trend

YCharts

Over that same time period, PINS materially grew its business, including achieving strong profit margins on a GAAP basis. The stock used to be an unprofitable high-flying growth stock – now the stock is priced as a legitimate value stock.

What is Pinterest?

PINS is one of the many social networking sites but with a twist: its users are more mission-driven than the swipe-endlessly type of users of other networks like Instagram or Facebook. This is an important detail to understand for their business model. We can see how PINS looks below – I compare it to be very similar with Instagram except with a clear shopping tilt.

Pinterest Shopping

Pinterest

PINS is a place where users can go to find ideas for creating cakes, or designing a perfect outfit for the day, or anything else. While PINS might look and feel similar to Instagram, the differing intent is very important to understand. PINS is seeking to make itself into a shopping app, one where users can discover what it is they really are seeking to buy, and buy it directly in the app. I expect this niche to help the company continue growing its average revenue per user over time.

PINS Stock Earnings

PINS closed out the year with another steep deceleration in growth rates. Revenue grew at only 20% – down from 43% in the third quarter and 125% just two quarters ago.

Pinterest Revenue

Pinterest 2021 Q4 Presentation

Of potential concern, monthly active users declined sequentially for the third straight quarter and finished down 6% year over year to 431 million.

Pinterest MAUs

Pinterest 2021 Q4 Presentation

Despite the decline in users, PINS was still able to increase revenues due to increasing average revenue per user by 23%.

Pinterest ARPU

Pinterest 2021 Q4 Presentation

The $ 7.43 in ARPU in the fourth quarter is still much lower than the $ 60.57 in ARPU posted by Meta (NASDAQ: FB).

While the deceleration in growth was quite disappointing, PINS did deliver strong profit margins, with adjusted EBITDA totaling 41% of revenues.

Pinterest Adjusted EBITDA

Pinterest 2021 Q4 Presentation

PINS has guided for the next quarter to see revenue growth in the “high teens.” While that represents yet another quarter of “normal” growth, investors may be pleased to see that it represents a much more tepid sequential deceleration in growth. It is worth noting that PINS is not facing the exact same post-pandemic headwinds as other companies because its business model is one which caters to both at-home and out-of-home use caes. As management discussed on the conference call,

“For example, the propensity of Pinners to adopt use cases like home decor or cooking in the fourth quarter of 2021 was similar to what we saw in the fourth quarter of 2019.”

Looking forward, the company’s mission will be to continue improving its importance as a shopping inspiration app, which will help drive improved pricing for its advertising.

Is PINS Stock A Buy, Sell, or Hold?

Based on the decelerating growth rates we have just seen, PINS had no business trading at the levels it did just several months ago. Yet at these levels, the valuations have become much too pessimistic. At recent prices, PINS is now trading at 6x trailing sales and 20x trailing non-GAAP earnings.

PINS ended the year with $ 2.5 billion of cash & investments versus no debt. That net cash makes up over 15% of the fully diluted market cap. Over time, I expect the non-GAAP profitability to translate into strong GAAP margins, especially as operating leverage takes hold. While I do not anticipate growth rates to return to the 80% level of the pandemic, or even to the 40% level, I do expect the company to continue driving ARPU higher on account of improving the relevance of its shopping app. This is all in spite of the likelihood that its user base will not grow nearly as fast as social networking competitors like Snapchat (SNAP) or Meta. The current stock price valuation is one in which the stock is trading at around a 1x price to earnings growth ratio (‘PEG ratio’). For a company generating solid free cash flow with a cash-rich balance sheet, that kind of valuation appears far too pessimistic, especially considering the possibility of upside surprise. I can see the stock trading up to at least a 1.5x PEG ratio, representing a 30x non-GAAP earnings multiple, if not higher. That represents 50% upside from capital appreciation, which would be in addition to the ongoing annual growth. The key risk here is if the company loses relevance as a shopping app, at which point it may not be able to drive increases in ARPU nor control the decline in MAUs. In my view the main competition is from Meta, but the wide discrepancy in ARPU between the companies makes me suspect that there is some margin of safety here. I rate shares a strong buy because the strong profit margins make the stock a lower risk proposition.

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