Pinterest: Beaten-Down Tech Stock With Strong Focus On Margin Expansion

Like many online advertising companies, Pinterest (NYSE:PINS) has seen material impact to its fundamentals due to the tough macro backdrop. Whereas growth was expected to accelerate exiting 2022 due to lapping tough pandemic comps, growth has instead continued to decelerate as demand for advertising decreased. Yet unlike unprofitable rival Snapchat (SNAP), PINS entered this storm from a position of strength, with solid profit margins and a pristine balance sheet highlighted by $2.7 billion of net cash. The valuation is not as cheap as it has been over the past couple of quarters due to the involvement of activist investors, but PINS remains buyable as one awaits a recovery in both the economy and tech sector valuations.

PINS Stock Price

While PINS remains far below all time highs reached in early 2021, the stock has bounced strongly off the lows.

I last covered PINS in January where I rated the stock a buy on account of the potential for accelerating growth as the company laps tough comps. That thesis has not materialized, as the weak macro backdrop took its toll.

PINS Stock Key Metrics

In its most recent quarter, PINS grew revenue by 4% YOY or 6% constant currency. Like many tech firms, PINS saw great weakness in Europe in which revenue declined by 7% YOY, likely due to the Russia-Ukraine war.

Monthly active users (‘MAUs’) continued to show strength, growing just over 1% sequentially and 4% YOY. While that growth rate pales in comparison to that seen at SNAP or Meta Platforms (META), it is still promising to see a return to growth after several quarters of declines.

PINS was the only social media company to show growth in average revenue per user (‘ARPU’) – likely due to the low nominal ARPU. ARPU grew by 1% globally, again in spite of weakness in Europe where it declined by 9% YOY.

PINS had previously soared strongly in July of last year after activist investor Elliott Management disclosed a sizable stake in the company. The two entities reached an agreement in December which seems to have led to PINS doing a round of layoffs. That cost discipline is beginning to have an impact on quarterly results, with most cost buckets staying stagnant sequentially or even declining. On the conference call, management noted that they had also slowed the pace of hiring, rationalized infrastructure spending and closed down smaller offices. Management expects these actions to contribute towards “meaningful EBITDA margin expansion in 2023.”

Adjusted EBITDA margins did decline meaningfully in the quarter as the company continued to suffer from actual revenue growth rates falling far short of those used for internal planning purposes.

PINS ended the quarter with $2.7 billion in cash versus no debt. That net cash position makes up more than 15% of the current market cap. The company announced a $500 million share repurchase program which makes sense considering the strong balance sheet position and cash flow generation. I would not be surprised if this share repurchase program was also recommended by Elliott Management.

Looking ahead, management expects first quarter revenue to “grow low single digits on a year-over-year percentage basis, which takes into account slightly lower foreign exchange headwinds than Q4 2022.” That is a disappointing forecast for investors hoping for a return to accelerated growth, as the company has fully lapped tough pandemic comps. On the bright side, PINS expects non-GAAP operating expenses to decline a “low double digits percent quarter-over-quarter.”

The crash in the stock price has clearly changed management focus from aggressively growing the top-line to focusing on expanding bottom line profit margins. That may be a winning formula in today’s market.

Is PINS Stock A Buy, Sell, or Hold?

As of recent prices, PINS was trading at around 6.4x sales. That represents a large premium to the roughly 3.55x sales that SNAP trades at.

Yet that premium may be justified. PINS is operating with solid profit margins with a clear path for further margin expansion. The stock is trading at around 36x earnings with fast projected growth moving forward.

I still see PINS getting to 30% net margins over the long term. Based on a return to 14% growth (lower than consensus estimates) and a 1.5x price to earnings growth ratio (‘PEG ratio’), I could see PINS trading at 6.3x sales, meaning that the stock is priced to provide returns in-line with its revenue growth rate. I note that the assumed 1.5x PEG ratio implies a sustained tech discount as I would expect the stock to trade at a multiple far higher than that in a true recovery in tech sector valuations.

What are the key risks? The strong profit margins at PINS are a clear positive, but it admittedly suffers from the same issues faced at SNAP – that of relevance. While PINS might not be suffering the same competitive threats posed by TikTok, it is not so easy to explain the importance of the platform to those who do not already love the platform, especially in relation to Instagram. It is possible that PINS returns to MAUs decline (which would likely be due to Instagram taking market share), at which point profit margins may deteriorate instead of expand. The valuation is not priced nearly as cheap as seen at SNAP and I would expect the stock to plummet in such a scenario. It is also unclear how the current macro environment will affect the company fundamentals. In addition to declining demand for online advertising, it is also possible that consumers reduce their time spent on PINS, as often times it is said that consumers use PINS to find ideas to complete personal projects (perhaps such projects will be placed on hold).

PINS might not be offering the best risk-reward proposition relative to cheaper albeit unprofitable tech peers, but it is still buyable considering the strong balance sheet and cash flow generation.