PINS

Pinterest, Inc.

21.47
USD
7.89%
21.47
USD
7.89%
16.14 81.77
52 weeks
52 weeks

Mkt Cap 12.08B

Shares Out 562.70M

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Pinterest: Improved Profitability Won't Last

Investment Thesis Pinterest (NYSE:PINS) has been through a really tough time during the past 12 months. Firstly, its strength during the Covid period meant that any comparisons against that period were always going to be lackluster. Now, the big overhang is how the company will navigate this higher inflationary environment. Further, although Pinterest has never really been the strongest social media platform, even at the best of times, it could still lay claim to its niche offering, which resonates strongly with a female audience. Its users are high-intent users looking for inspiration. But despite all these elements, when it comes to it, Pinterest has struggled to gain sufficient traction, and its recent MAU figures reflect this much. Altogether, Pinterest is once again priced below its IPO price. And I'm not bullish on its prospects. Pinterest's Q2 guidance points to 11% y/y revenue growth rates. That is the toughest quarter that Pinterest has to come up against. After that, the remaining quarters of the year should be meaningfully easier. Investors are hoping to hear some positive surprises once Pinterest gets past Q2. That's the bull thesis in a nutshell, that H2 should be better than H1. Pinterest's Medium-Term Prospects Discussed There's a lot to like about Pinterest. It's arguably the only social media platform that its users come with a planning mindset. Given users' intent-based searching behavior, its largely female audience ends up leaving behind plenty of very valuable first-party data on the platform. This translates into Pinterest's ARPU being strong and growing, even as MAUs continue to decline y/y. And that's exactly the dynamic that you see above, high ARPUs against declining MAUs. As an investor, that's a troubling sign. To help us contextualize Pinterest's figures, let's discuss Twitter's (TWTR) recast mDAUs. Twitter has been on the news a lot lately. The topic is that there's a questionability over Twitter's mDAUs. Its recently updated figures point to global mDAU (monetizable daily active users), being up 16%. Even if these numbers are stretched by 1% or even 2%, the fact remains, for the same period, Twitter's users have grown in size, while Pinterest's are declining. This is not a good trend for Pinterest's platform. And next, we'll discuss its profitability profile. Pinterest appears to be focused on improving its profitability profile. To illustrate, in last year's Q1, its GAAP operating margins were negative 4%. This time around, its results improved to less than 1% negative. It's not only that there is a more than 300 basis point improvement in profitability. It's more important than that. It shows that Pinterest is essentially close to breaking even after accounting for stock-based compensation. That's clearly good news. That being said, management guides ahead that, For the full year, we expect non-GAAP operating expenses will grow between 35-40% year-over-year. Consequently, even if we presume that management has been aggressive with this expenses guide to allow better bottom line beats down the line, the fact remains that Pinterest's improved profit margins are likely to be short-lived. In fact, during the earnings call, management stated that, We expect the second quarter non-GAAP operating expenses to grow at 10% quarter-over-quarter as we push some of the spend from Q1 into Q2 and beyond. In the quote above, management is letting investors know that Pinterest is going to increase its losses when it reports Q2 results. Moving on, consider this, with the stock falling so dramatically, in order to retain executive talent, Pinterest will have to pay up. To this end, during the call, Pinterest states that it recognizes that this is ''a competitive hiring environment''. For now, the total number of shares outstanding are only up 5% y/y, but I believe that Pinterest is signalling to investors that as 2022 unfolds, Pinterest will have to increase its stock-based compensation. Presently, there are 51 million shares that are out of the money options and restrictive stock units. This means that there's around $100 million worth of compensation that management has missed out on. Clearly, this at some point will have to show up as increased stock-based compensation. Watch this space. Do you know what the red arrow below demonstrates? The point at which analysts have started downwards revising their EPS estimates. As an investor, what you want is to buy a cheap stock, where analysts are busily upwards revising their EPS estimates. You don't want to buy a stock at fair value, that analysts then proceed to downwards revise their outlook, leaving the stock richly valued. That's not a good place to be in. Looking ahead, for now, analysts following Pinterest price the stock at 24x forward EPS. While I believe that Pinterest's profitability will ultimately negatively surprise analysts, the fact remains. Even at 24x forward EPS, Pinterest is too expensive, for what's on offer. You don't want to pay 24x forward EPS for a stock that's struggling to grow in the mid-teens. Mathematically, that simply doesn't make sense. The only theme that investors have known in the past several years has been ''buy the dip''. At any cost. Irrespective of a company's future potential, ''buy the dip'' has always worked, like a charm. However, I now contend that we are entering a new investment period. Let's call this period the ''revenge-of-the-old economy''. In this period, blindly buying tech stocks will not be commensurate with strong returns. 2022 will be the year of the stock picker. Where investors have to be selective and choose their spots. With that in mind, I believe that the recent stability in Pinterest's share price has lulled investors into inaction. I believe that over the coming months, we'll look back to $21 a share for Pinterest, and wonder how long until it returns to this price. Indeed, I believe that there are easier investments available, with stocks priced at 10x free cash flows, with much more attractive upside potential. Strong Investment Potential My Marketplace highlights a portfolio of undervalued investment opportunities - stocks with rapid growth potential, driven by top quality management, while these stocks are cheaply valued. I follow countless companies and select for you the most attractive investments. I do all the work of picking the most attractive stocks. Investing Made EASY As an experienced professional, I highlight the best stocks to grow your savings: stocks that deliver strong gains. Deep Value Returns' Marketplace continues to rapidly grow. Check out members' reviews. High-quality, actionable insightful stock picks. The place where value is everything. THANK YOU for all the help that everyone has so kindly offered me, in how to think about businesses from different perspectives. DEEP VALUE RETURNS: The only Marketplace with real performance. There are no gimmicks and no place to hide because all I care about is delivering high performance against the S&P500. WARNING: Any stocks that you feel like buying after discussions with me are your responsibility. Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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