Stock has good advertising potential, plus benefits from a reputational clean slate and more time spent online.
Possibly the most dynamic US company reporting this week – and a relatively fresh story – is NYSE-listed Pinterest (NYSE:PINS).
This image sharing and social media platform was founded 10 years ago and has grown rapidly to become one of the top ten largest social networks.
Starting out this way with online pin boards that users can display their interests on – hence ‘Pinterest’ - the company developed visual search and e-commerce such as shopping catalogues.
It remains the fastest-ever website to break through the 10 million unique visitor mark, having achieved over 11 million total visits weekly by the end of 2011.
Floating in April 2019 at $19 (£14.67) a share, it initially closed at $24.4. Yesterday it achieved its biggest one-day leap, up 27% to $62.5, having declared bumper third quarter 2020 results.
Reasons to sense a new market leader
Revenues – the chief criterion for growth stock investors – have soared 58% to $443 million, an 11% improvement on expectations, and earnings per share of 13 cents also topped predictions.
Total monthly active users (MAUs) surged 37% to 442 million, year on year, within which US MAUs rose 13% but international soared 46% to 343 million. This underlines how Pinterest is now a truly international business and stock.
Average revenue per user rose 15% to $1.03 driven by higher advertising demand. This may sound puny, but 442 million users implies scope to leverage revenue.
Not surprisingly a $37.5 billion (£29.0 billion) valuation discounts plenty, given 2019 involved an operating loss of $1.4 billion on $1.1 billion revenue.
Such a colossal price/sales ratio puts Pinterest among those speculative growth stocks that have ridden high on the back of Federal Reserve stimulus since March.
Ultra-low interest rates have driven demand stocks perceived most likely to ramp up long-term cash flows.
But I think support for Pinterest constitutes more than trends in capital allocation. The pandemic is fuelling far more time online, a behavioural change liable to stick as people get addicted to favourite sites.
Yes, Microsoft (NASDAQ:MSFT) has reported bumper sales of its Windows operating system and subscriptions to Office software, but this could be largely a one-off shift as companies re-adjust to more working from home.
Pinterest's benefit from a resurgence in advertising could similarly prove transient; but it would appear the stock market was rational to re-rate its stock while Microsoft has looked tired this week. Pinterest's community may continue to swell as more users get attracted and platform functionality evolves.
A visual search engine of pins and boards
‘Pinners’, as users are known, can fix images and videos – linked from websites or uploaded – on their boards and ‘re-pin’ those of others, for example around particular themes.
This allows scope then for advertisements in the form of ‘promoted pins’. This is similar to how Facebook (NASDAQ:FB) Twitter (NYSE:TWTR) and Google (NASDAQ:GOOGL) generate adverts specific to your interests, having tracked your online activity.
Capable personalised media like this looks to have its future sewn up versus the shotgun approach of TV adverts, especially as young people congregate on their favourite websites more during lockdown and the winter months.
In its early years Pinterest’s following was more than 80% female. More recently there has been an approximate 60% versus 40% split with men. Unsurprisingly then, shopping has been a prime area of interest hence the appeal for advertisers.
A ‘rich pins’ tool lets users better search for pins made by companies to promote their wares.
‘Product pins’ enable direct purchases, and the site continues to refine and evolve the personalised shopping experience.
Even as a man who buys essentially practical items online, I can envisage this becoming a dominant form of shopping – shorn also of controversies that have bedevilled Facebook and Twitter.
Akin to Google, Pinterest has an analytics side that collects data on how popular a product is at any time, helping advertising agencies tailor their approach for maximum appeal and results. Not surprisingly, Pinterest’s revenues from shopping adverts are growing faster than its revenues overall.
Several positives have coincided
Bumper revenue and MAU growth may reflect an exceptional third quarter 2020. We know that London-listed WPP (LSE:WPP) said the trough for global advertising was the second quarter and an extent of resurgence was always due, as global lockdowns broadly ended by June.
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July was very strong for Pinterest, with revenue up 50% on 2019, after which management had expected a decline over the rest of the quarter.
But advertising demand remained strong, and September also saw a like-for-like 37% jump in users to 442 million on 2019.
Management expects 60% revenue growth during the current fourth quarter versus 35% modelled by analysts.
However I recall from WPP’s observations, going back to 2016, how US advertising tends to benefit from the run-up to a presidential election as more people tune in to media.
Pinterest also concedes it has also gained nearly 4 million MAUs due to young people upgrading their iPhones to the iOS 14 operating system and using Pinterest to source new background filters.
Quarterly comparisons of growth rates might therefore dip going into 2021.
|Pinterest Inc - third quarter financial highlights|
|Three months ended 30 Sep|
|Monthly Active Users|
|Average revenue per user|
Source: Company REFS
Facebook and Twitter fading from highs
Both these stocks plunged in after-hours trading last night after results proved mixed messaging. Facebook showed uncertainty ahead, with its MAU’s actually down on the second quarter and its expecting this to continue.
Year-on-year however MAU’s are up 12% (14% including Instagram, Facebook Messenger and WhatsApp), revenue by 22% and net income by 29% to $7.9 billion – i.e. genuine financial substance versus Pinterest’s earnings before interest, tax, depreciation and amortisation take on profit.
Manifestly, Facebook is a social media juggernaut and if it experiences engine trouble anytime then Pinterest shares may be affected. Facebook management takes a conservative view: how the pandemic has accelerated a shift to online commerce, but if this changes in 2021 then it could mean a headwind for advertising revenue growth.
Facebook is therefore a caution not to over-react to Pinterest’s glowing third quarter and bullish guidance for the fourth.
Yet I am broadly bullish on Pinterest shaping up as platform appearing clean and well-attuned for advertisers, versus the Facebook and Twitter bosses once again being questioned this week by US senators.
Both such social media companies are looking rather tired: Twitter’s third quarter revenue is up 14% but its MAU growth has failed to impress.
Technical chart uptrend since March
After floating the stock bumped along sideways, reaching $35.4 in August 2019, then a downwards trend accentuated to a $10.9 low with the March 2020 sell-off. I concede that shows traders lacking conviction.
The new trend since has been consistently positive, with only minor profit-taking and no bad surprises. The question for fresh money is whether this essentially reflects a boom from the pandemic, which fades according to Facebook’s cautious view, or is a relatively permanent shift in demand for the likes of Pinterest.
My strategic view is for interest rates to remain outstandingly low in historic context, with significant ‘reversion to mean’ values among growth stocks postponed.
More likely, enough investors will ‘buy the drop’ in growth stocks, as and when that happens, as part of a diversified approach. You should therefore remain aware of fresh new names in the Keynesian beauty contest.
Keynes’s advice remains valid, as it proved during the first half of the 20th century: you are significantly trying to guess less what individual companies will achieve and more those gaining most votes from judges, i.e. other market participants.
Outstripping expectations, also relative to social media rivals, Pinterest’s latest numbers position its stock as just such a pretty face – the kind needed to drive the next stage of an equities bull market. I suspect this is another reason behind yesterday’s 27% re-rating.
Such a spike on a $37 billion stock, lacking established earning power, seems virtually certain to consolidate back. Defining an entry level is impossible but for those seeking awareness of a next international growth stock on a multi-year view: ‘Buy’.
Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.
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