Shares of Pinterest Inc. (PINS, Financial) have fallen a long way from February 2021 highs of more than $80. As of this writing, shares change hands for around $22.38, making the stock significantly undervalued based on the GF Value chart.
Pinterest is not quite as undervalued as the GF Value would lead one to believe, in my opinion. The GF Value considers past returns, historical price multiples and analysts’ estimates of future business performance, so after a stock bubble forms and then pops, it can sometimes lead to assumptions of future valuation multiples that are unlikely to appear anytime soon.
That being said, Pinterest operates a unique image-based social media platform that is only just beginning to be monetized. A new CEO and a partnership with an activist investor are improving the roadmap for success, and while pandemic-era growth is likely behind the company, the outlook is still positive. All things considered, the stock could still be in value territory.
Pinterest’s unique appeal
Unlike most other social media platforms, where users share photos and text with friends or other users who look up them in particular, Pinterest allows users to curate personal pinboards of photos uploaded by themselves, friends, strangers, companies or other entities.
In other words, whereas other social media platforms are focused directly on the users, Pinterest focuses on the inspirational power and the appeal of products in images. In some ways, it functions as more of a search engine than a social media platform, as it facilitates the discovery of new information.
It is undeniably easier to scale and grow ad revenue in the user-focused model due to the digital replacement of in-person social interaction and the greater ability to collect user data and serve targeted ads.
However, Pinterest has much higher potential to serve ads for products that customers actually want to buy rather than just ads based on the (often inaccurate) profiling of personal information. It also charges advertisers based on engagement or action rather than just by click, which could be more attractive to businesses as it increases their return on investment.
Focusing on user experience and monetization
Pinterest’s focus on improving the user experience of customers simultaneously with the monetization prospects for advertisers is central to its growth strategy and potential.
To boost its growth efforts, Pinterest has been working with activist investor Elliot Management, which has amassed a 9% stake in the stock in recent months.
According to newly appointed CEO Bill Ready, Pinterest has a “very collaborative and engaged dialogue” with Elliott, which fuels hope that the activist investor will help to drive meaningful change.
Ready took the helm on June 28 after previously serving as president of Commerce, Payments and Next Billion Users at Alphabet’s Google (GOOG)(GOOGL). The previous CEO, co-founder Ben Silbermann, transitioned to the role of executive chairman.
“In our next chapter, we are focused on helping Pinners buy, try and act on all the great ideas they see,” Silbermann said. “Bill is a great leader for this transition. He is a builder who deeply understands commerce and payments. And he shares our passion for creating a positive corner of the Internet. I’m confident he’s going to be an outstanding CEO.”
Ad spending headwinds ahead
While Pinterest remains positive on its outlook, both the company and investors realize the 52% revenue growth achieved in 2021 will not continue, which is why a certain level of devaluation in the stock is to be expected on top of the general market decline.
For 2022, analysts are expecting Pinterest’s revenue to increase by 17% and its adjusted earnings per share to decrease by 17% year over year.
The negative bottom-line outlook is driven by pessimism for the ad business. As the economy slows down with the potential to tip into recession on the back of high inflation and interest rates, it is likely that companies will slash their ad spending budgets, directly cutting into the wallets of advertising platforms.
Even if the economy does enter a recession, though, it is bound to recover eventually, which will cause advertising-related stocks to rebound. The more persistent issue, as pointed out by Benchmark analyst Mark Zgutowicz, is that the platform has a rather niche appeal. Pinterest’s discovery-focused model is not everyone’s cup of tea, which will limit its total addressable market.
Valuation
As mentioned above, Pinterest is significantly undervalued based on its GF Value, but without the prospect of another 52% sales growth figure this year, it is doubtful that previous valuation multiples will appear again soon (if at all).
The price-earnings ratio of 41.67 seems a little high considering the bottom line is expected to be volatile through at least 2024. I would prefer to see meaningful changes implemented to promote long-term growth before considering the current price level to represent value.
One thing Pinterest has going for it is a balance sheet that is well-positioned to weather difficult market conditions and fund growth initiatives. The cash-debt ratio of 13.22 and Piotroski F-Score of 7 out of 9 show the company is in excellent financial health. The return on capital of 61.53% and earnings yield of 3.23% show Pinterest’s growth adds to shareholder value.
Takeaway
Pinterest is a unique social media advertising prospect that shows strong potential for long-term growth despite short-term headwinds. It is promising that the company is working with Elliot Management and recently appointed a new CEO with experience in commerce, payments and user growth.
The stock price has fallen to a much more reasonable level than last year, but I would not call it undervalued just yet. Given upcoming volatility, there will likely be time to wait and see what kinds of changes the new CEO brings about and evaluate their contribution to growth potential.
