HomeMost PopularPinterest Stock (NYSE:PINS): Re-Accelerating Growth Is Promising, But Beware of the Valuation

Pinterest Stock (NYSE:PINS): Re-Accelerating Growth Is Promising, But Beware of the Valuation

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Pinterest stock (NYSE:PINS) has risen over the past year, with a re-acceleration in growth reigniting investors’ interest. The idea-sharing platform’s user base has been expanding, with a growing number of users from high-quality regions driving strong gains in revenue per user. Notably, the ongoing top-line expansion has resulted in free cash flow snowballing. Nevertheless, investors should be wary of the stock’s valuation, which could be rich at current levels. I am neutral on PINS stock.

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Accelerating User Growth Inspires Confidence

Pinterest’s Q1 results sparked significant enthusiasm in the market, as its accelerating user growth figures inspired confidence amongst investors. In earlier quarters, we had seen Pinterest’s user growth decelerate to the single digits. This primarily came from international markets, where Pinterest struggled to generate substantial revenue per user.

Nevertheless, Pinterest’s first-quarter results saw this trend reversing. Global Monthly Active Users (MAUs) exceeded 500 million for the first time ever, reaching a record of 518 million. This marked a year-over-year growth of 12%, compared with 11% in the previous quarter and 7% in the prior-year period.

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Q1 Investor Presentation

The company has been employing several strategies to fuel user growth. These include leveraging AI for enhanced relevance and personalization, intensifying curation efforts with boards and collages, increasing engagement across its main platforms, and, ultimately, offering a more positive alternative to traditional social media. These actions have proven a winning strategy for Pinterest, with management remarking they are winning with Gen Z, comprising more than 40% of its users.

User Growth Drives Strong Revenue Increase

Pinterest showed significant user growth in Q1, which contributed to a strong revenue increase. Specifically, while the Rest of the World (RoW) market led user growth at 16%, MAUs in North America and Europe also saw noteworthy growth of 3% and 10%, respectively.

As a result, Pinterest’s average revenue per user (ARPU) climbed by 10% to a new Q1 high of $1.46, leading to total revenue growth of 23%—the highest in two and a half years (10 quarters).

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Q1 Investor Presentation

Free Cash Flow Surges, But Beware of The Valuation

With Pinterest driving some of the strongest revenue growth in recent years, the company has seen its free cash flow surge. With its business model requiring minimal capital expenditures, the company was able to convert nearly 97% of its operating cash flow into free cash flow. Specifically, operating cash flow for the quarter came in at $356.1 million, with free cash flow coming in at $344.0 million. Consequently, Pinterest’s free cash flow over the past 12 months climbed to $767.5 million.

The company should be able to grow its free cash flow in the coming quarters, assuming it sustains a meaningful growth rate. Wall Street already predicts that free cash flow will exceed $1.25 billion by FY2025.

That said, investors should remain wary about the stock’s valuation. For starters, Pinterest’s stock-based compensation levels remain quite elevated, inflating its free cash flow. Stock-based compensation was $162.5 million in Q1, increasing from $143.1 million in the prior year. The problem is, however, that on a GAAP basis, the company is still losing money. Its actual net income margin for the quarter came in at a negative 3%.

Even if we utilize the company’s adjusted earnings, which includes stock-based compensation, Pinterest stock appears overvalued. Wall Street forecasts adjusted EPS of $1.45 for the year, indicating a price-to-earnings (P/E) ratio of 29.5X. This is truly a rich multiple given that a non-GAAP EPS is already inflated due to SBC, while investors can buy its social-media peer, Meta Platforms (NASDAQ:META), these days at a lower valuation while enjoying higher growth and a much wider margin of safety.

Is PINS Stock a Buy, According to Analysts?

Regarding Wall Street’s view on Pinterest, the stock features a Moderate Buy consensus rating based on 15 Buys and six Holds assigned in the past three months. At $46.17, the average Pinterest stock price target implies 7.95% upside potential.

If you’re wondering which analyst you should follow, the most profitable analyst covering the stock (on a one-year timeframe) is Mark Mahaney from Evercore ISI, with an average return of 124.75% per rating and an 81% success rate. Click on the image below to learn more.

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Takeaway

While Pinterest showcased a strong rebound in user and revenue growth in its Q1 results, investors should approach the stock cautiously. Despite the surge in free cash flow and promising re-acceleration in growth, concerns persist due to the high levels of stock-based compensation and GAAP net losses. This is particularly evident when compared to Meta, which trades at a more attractive valuation despite its superior growth prospects and overall margin of safety.

Disclosure

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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