We upgraded the shares on October 19, primarily reflecting our view of PINS’s potential to better monetize its platform, while we think issues/concerns surrounding active user growth and engagement are now largely reflected in the stock price.
PINS primarily generates revenue by delivering ads on its website and mobile application. The company's users (who the company calls Pinners) often don't have the words to describe what they want, but they know it when they see it.
On Pinterest, people discover personalized visual content, which it calls Pins. Pins are created when Pinners, creators, and businesses make new content for or save existing web content to the company's platform. Pins are saved and organized into collections, which the company calls boards and sections. Browsing and saving visual ideas on its service helps Pinners imagine what their future could look like.
We see higher monetization as PINS continues to "step on the gas" in its efforts to place and sell ads, especially ex- U.S., and looks to improve the apps advertisers use to place ads and analyze campaign effectiveness.
We also see potential for PINS as its social network is organized around members' "interests," a more explicit signal of purchase intent than a "like" or a "follow" organized by relationships, allowing greater potential to monetize the platform.
We believe the first half of 2022 marked the hardest comparisons to the elevated pandemic growth rates. We also think engagement levels should begin to improve after dropping once the economy fully re-opened post-Covid. That said, we acknowledge a much more challenging ad landscape that could continue to limit upside to revenue in the interim.
Shopping is a source of potential growth for PINS as the company looks to transition from one that is focused on inspiration and intent to one that looks to drive that intent into action. Doing this should also improve engagement and better monetize the platform (e.g., offer to provide direct checkout on the platform or even just a link and high-quality handoff to the retail outlet).
We project PINS adjusted EBITDA margin to expand to 17% in 2023 and 20% in 2024 compared to an estimated 15% margin for 2022. We believe that PINS is in investment mode, which should translate into an acceleration of revenue growth in 2023 and an improving margin profile.
Our 12-month target price of $28 is based on a P/E of 26.2x our 2024 EPS estimate, above peers to reflect our view of PINS attractive balance sheet ($2.7 billion net cash and absence of debt) and greater prospects to successfully monetize the platform than its peers.