Growth stocks have witnessed a sharp correction in the recent market downside. This does not come as a surprise as several growth stocks were trading at euphoric valuations prior to the Fed’s monetary tightening shift. However, markets tend to overreact on both sides, and the correction might now present some attractive buying opportunities for investors.
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One stock that deserves a place in the portfolio at current valuations is Pinterest (PINS). After a decline of about 48% in the last six-months, I am bullish on the stock. I believe that a reversal rally is due after some consolidation.
At the onset, it’s important to understand the reasons for Pinterest stock correcting sharply, beyond the broad market sentiment.
During the COVID-19 pandemic, social media and online shopping trends gained significant traction. However, with vaccinations and relative easing of social distancing norms, the story has changed. Monthly active users for various online platforms have declined on a relative basis.
Pinterest is no different. For Q1 2021, the company had reported monthly active users of 478 million. For Q1 2022, active users declined to 433 million. While revenue has increased on a year-over-year basis, the decline in users has concerned shareholders.
However, given the deep correction, this factor seems to be discounted in the stock. Amidst the growth concerns, the markets seem to have missed several positives.
On TipRanks, PINS scores a 6 out of 10 on the Smart Score spectrum. This indicates a potential for the stock to perform in-line with the broader market.
Pinterest has Long-Term Growth Visibility
Even with a decline in active users on a year-over-year basis, Pinterest reported revenue growth of 18% for Q1 2022. The reason is the positive trend in average revenue per user.
The global ARPU increased by 28% to $1.33. If the ARPU growth sustains, Pinterest is positioned for revenue and cash flow upside. Even if the monthly active user growth trend is relatively muted.
It’s very likely that ARPU growth will sustain. For Q1 2022, the ARPU for U.S. and Canada was $4.98. For the same period, the European region ARPU was 72 cents. However, the ARPU for the rest of the world was just eight cents. The positive data was that the ARPU for rest of the world accelerated by 164% on a year-over-year basis.
This is a critical point as 51% of the company’s monthly active users were from the rest of the world. This segment is a potential game-changer for the company.
Another reason to be bullish is the company’s focus on enhancing the shopping experience on Pinterest. In the next few years, Pinterest is likely to be a proxy e-commerce platform with a global presence.
The company is also working on making shopping on Pinterest more personalized. In Q1 2022, the beta version of “Your Shop” was launched. Additionally, the partnership with WooCommerce allows merchants to transform their product catalogue into shoppable product pins.
If the shopping experience gains traction on the platform, the company is likely to witness meaningful growth in advertising revenue. This is likely to boost the ARPU in the next few years.
Strong Fundamentals to Invest in Growth
While Pinterest faces near-term headwinds, the company is positioned for investment in product development.
As of Q1 2022, the company reported cash and equivalents of $2.68 billion. Additionally, the company reported operating cash flow of $213 million for the quarter. This implies an annualized OCF potential of $850 million.
Considering the point that Pinterest has witnessed steady growth in ARPU, annual cash flows in excess of $1.0 billion seems likely. Pinterest is therefore well positioned to pursue organic and acquisition driven growth.
Earlier this month, Pinterest announced the acquisition of The Yes. The latter is an AI based shopping platform for fashion. The acquisition will help Pinterest in building an end-to-end shopping platform.
It’s likely that there will be more acquisitions that are targeted towards boosting growth and enhancing the shopping experience. It’s therefore too early to assume that the best part of growth is over for Pinterest.
Wall Street’s Take
Turning to Wall Street, Pinterest has a Moderate Buy consensus rating based on six Buys and 17 Hold rating assigned in the past three months. The average Pinterest price target of $28.19 implies 46.52% upside potential.
Concluding Views
Pinterest has a global addressable market and there seems to be ample scope for ARPU upside from emerging economies. The company has the financial flexibility to invest in innovation and acquisitions.
Globally, the number of online shoppers will continue to trend higher in the coming years. As a proxy e-commerce platform, the company is well positioned to benefit.
The business has already delivered in terms of healthy cash flows. As ARPU swells, there is visibility for free cash flow upside and value creation.
The deep correction in PINS stock therefore seems like a good accumulation opportunity. Over the next few years, the stock is likely to be a value creator.
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