An Under the Radar Stock With 35%+ Upside Potential

Investment Summary

Pinterest Inc. PINS is a leading online platform where users can shop products. The company has been successful in harnessing the power of AI that has delivered benefits to all of its stakeholders – customers, advertisers and the business internally. Moreover, transformation of its ad platform has helped the company to deliver a record quarter with over $1 billion in revenues. The company's international business, which is growing at a stellar pace compared to its US business holds promise to deliver future growth. Our fair value estimate for the stock is $36.00.

Overview

Pinterest Inc. PINS is an online platform for visual search and discovery that helps its users to find inspiration, curate ideas and shop products. The company boasts of around half a billion monthly active users globally.

Several AI-based initiatives delivering significant benefits

In the last one year, PINS has undertaken several AI-based initiatives, that have delivered significant benefits. In our view, these initiatives have benefited all the stakeholders such as customers, advertisers and the business internally.

First, PINS has managed to increase the context that feeds into the AI model based on saves and clicks by 30-fold. More powerful ML models mean better understanding of the content the customers might enjoy. We believe this has delivered significant results as evidenced by 250 bps increase in saves and 150 bps increase in outbound clicks. Moreover, this has been achieved with minimal increase in the infrastructure spend.

Second, on the monetization side, AI has helped deliver relevant ad loads to the users. In the lower funnel phase of shopping journey more ads are displayed while a few in the upper funnel of the discovery phase. This has resulted in doubling of relevance for top ad slots.

Third, is use of AI by internal engineering teams to enhance productivity. The teams use coding assistants and around 15% of the code is generated through AI.

Lastly, AI has delivered results for advertisers in terms of better performance and efficiency by automating much of the campaign process.

In our view, PINS is well positioned to harness the benefits of AI across its business processes.

Transformation of Ad Platform improves monetization and benefits advertisers

PINS has successfully managed to transform its ad platform, that in our view, not only improves monetization but also delivers several benefits to the advertisers.

In terms of lower funnel launches, PINS helped users directly access advertisers web or mobile property, thereby significantly increasing the clicks. Moreover, it used privacy centric measurement tools enabling the advertisers to accurately measure the spend.

Moreover, it launched promotional ads to highlight special offers during key promotional periods. This has resulted in 18% increase in conversion rate as compared to ads without promotion.

Further, PINS has helped advertisers to automate their campaigns and improve performance through lower CPCs and CPAs.

We believe these steps have delivered significant results. PINS has manged to report a record quarter with more than $1 billion in revenue in a single quarter underpinned by strong ad platform. Moreover, the company witnessed record revenues during cyber 5 holiday while lowering CPAs by 30% YOY.

International business – the next growth engine

With a 22% share of overall revenues for 4Q24, in our view, the international business holds promise to become the next growth engine for PINS.

The company's international business – both Europe and Rest of the World have delivered stellar performance as compared to the core US and Canada business. In terms of topline growth, Europe segment grew by 21% YOY during 4Q24 and RoW increased by a solid 44% as compared to just 16% for US and Canada.

Moreover, the MAU growth for Europe was strong at 7% and RoW reported 15% growth that is significantly better than 4% for US and Canada. Likewise, the ARPU growth for RoW was 24% that was almost double than 12% for US and Canada.

The company has entered into partnerships with Amazon Ads and Google and launched resellers in over 30 markets. In our view, these efforts are paying off as evidenced by solid topline growth for RoW throughout 2024.

Share Buyback to Limit Downside

In November 2024, Pinterest announced a $2 billion share repurchase program. Now, I consider this significant given the fact that this represents nearly 12% of the Company's current market capitalization. In our opinion, the large share repurchase program also implies that the management is confident of generating significant free cash flow going forward. If executed well, the buyback has the potential to not only limit the price downside but enhance return for the shareholders.

Financial Projections

In our view, PINS will be able to deliver low-teens topline growth for FY25-26 driven by the strength of its international business. We expect margins to expand as Pinterest leverages its fixed costs and drive operational efficiencies. As such, we are modelling EBITDA margins to improve from 28% in FY24 to 30% in FY25. Factoring in net interest income of $108 million and tax rate of nearly 21%, leads me to diluted EPS of $1.55 for FY 2025. For 2026, we expect sales growth of 12% YOY, and an EBITDA margin of 32%. This leads to diluted EPS of $1.83 for 2026.

Valuation

For valuation purposes, we are using P/E relative valuation to arrive at the fair value of PINS.

We have compared PINS with some of its peers. We value PINS using target multiple of 19.4x on P/E method, in line with the peer group average. Important to note that, PINS is growing faster than many of its peers over 2024-26e and as such should command a multiple at least in line with the peer group average. Based on 2026e EPS of $1.83, the fair value estimate stands at $36.00.

Risks

Below are the main risks to our investment thesis:

• Given that PINS generates substantially all of its revenue from advertising, any macroeconomic slowdown could hurt its growth prospects. Dependence of key categories such as consumer packaged goods and retail also remains a risk.
• We see third-party reliance risks especially high dependence on Amazon AWS. PINS uses AWS for majority of compute, storage and data transfer. As such any disruption to the AWS services could negatively impact PINS operations.
• High competitive intensity is a risk. The company competes with several large and well-established players such as Amazon and Google. However, we believe that PINS' focus on AI-driven personalization and ad targeting capabilities could help it mitigate rising competitive intensity.

Disclaimer

This report is based on information we consider reliable, including the subject of the report. This report does not explicitly or implicitly affirm that the information contained within this document is accurate and/or comprehensive, and as such should not be relied on in such a capacity. All information contained within this report is subject to change without any formal or other notice provided.

This document does neither constitute an offer nor a request to buy or sell any securities. It only serves informational purposes. This report does not consider individual circumstances and does not take into consideration individual investor preferences. Recipients of this report should consult professionals around their personal situation, including taxation. Statements within this report may constitute forward-looking statements, these statements involve many risk factors and general uncertainties around the business, industry, and macroeconomic environment. Investors need to be aware of the high degree of risk in equities.

GSBR Research has not received any compensation for this article. We do not own any stock holdings nor do we have plans to purchase the shares in the next 72 hours.