Is Pinterest Stock a Buy?

Social media stocks have exploded over the past year, and Pinterest has been one of the biggest winners.

The sector went from initially being a victim of the COVID-19 lockdown as advertisers scaled back on spending to then reaping the rewards of occupying a high-traffic digital channel during a period when things like screen time and online shopping have been up sharply.

Pinterest stock has nearly quadrupled since the beginning of 2020 as sales surged in the second half of the year, and profitability improved significantly as well.

There’s no question buying Pinterest a year ago was a smart move, but is it still a buy today? After all, the tech stock has gotten pricey at a price-to-sales ratio of 27. Let’s take a closer look at Pinterest to see what it has to offer today.

The positive social media platform

Pinterest differentiates itself from peers like Facebook, Instagram, and Twitter with its focus on being a positive space. CEO Ben Silbermann has said that Pinners, as the company calls its user base, come to the site to work on themselves rather than connect with other people. Pinners use Pinterest to get inspiration and ideas for everything from home furnishings to weddings to cooking and children’s activities. That focus has helped insulate Pinterest from some of the controversy that’s surrounded other social media companies like Facebook and Twitter, which have been accused of everything from allowing hate speech to undermining democracy. Pinterest bans political ads, and its model doesn’t allow for the kind of trolling that typify interactions on other social media platforms. That has also made it appealing for advertisers, who don’t have to worry what their ads will run against. Even better, most Pinterest users say they want to see ads as they come to the site looking for ideas about things they want to purchase and to discover new products.

What the numbers say

Pinterest’s sales growth has seen a remarkable acceleration over the past year.

PINS data by YCharts

After hitting a nadir of just 4% growth in the second quarter, revenue growth accelerated to 76% in the fourth quarter, a record for Pinterest since its 2019 IPO, as it benefited from the combination of strong holiday advertiser demand, international expansion, return on new products such as Story Pins, and improvements in ad measurement tools.

Other metrics also show the company executing effectively. Monthly active users increased 37% last year to 459 million, and average revenue per user rose from $1.22 to $1.57, even as its international segment, where monetization rates are lower, is growing faster than its domestic business. What’s most impressive, however, was that adjusted EBITDA jumped from $77 million to $299 million in the fourth quarter, generating a 42% margin. That shows Pinterest has quickly gone from a cash-burning company to one with a highly profitable business model, much as digital ad titans such as Facebook and Google enjoy. While seasonality had some impact on the strong EBITDA margin as adjusted EBITDA was near breakeven for the first three quarters, the strong bottom-line result bodes well for the company heading into 2021, especially as management guided for revenue growth in the low-70% range for the first quarter.

Is it a buy?

Investors shouldn’t expect Pinterest shares to quadruple again over the next year, but the company still has a number of tailwinds working in its favor even as the pandemic fades and consumers return to more normal ways of spending their time. First, the surge in monthly active users gives the company a larger base to be monetized, and it still has a long way to go to capitalize on that user base as it’s had promising results recently from developing ad products such as automatic bidding and shopping ads. Its average revenue per user is still a fraction of what Facebook has, showing it should be able to keep growing ad spend, especially given the value of its image discovery model and the fact that so many Pinners say they want ads.

The company seems to have reached a tipping point in the fourth quarter. Advertisers flocked to the platform in the wake of a boycott against Facebook last summer, and Pinterest has scaled enough that it’s now generating strong profit margins. Given its first-quarter guidance, that momentum seems to pick up speed in 2021. Even though the stock may look expensive, Pinterest has a bright future ahead of it. Buying the stock now, down nearly 20% from its high earlier this year, is likely to pay off over the long term.