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Pinterest Stock Is Richly Valued and Running out of Room to Run

Thomas Niel

Pinterest (NYSE:PINS) is down 30% from its all-time high of $36.83/share with Pinterest stock currently trading around $25.80/share, well above April’s IPO price of $19/share. The social media platform continues to see explosive growth.

Pinterest Stock Is Richly Valued and Running out of Room to Run

Source: Nopparat Khokthong / Shutterstock.com

But the upside potential could already be priced into shares. Based on valuation, it seems that investors may be better off waiting for lower prices before diving into PINS stock.

Let’s take a closer look, and see why now may not be the time to buy Pinterest stock.

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Turning PINS into Dollars

For the quarter ending June 30, 2019, sales grew 62% from the prior year’s quarter to $261.2 million. The company continues to generate operating losses. But based on analyst consensus, the company could reach profitability by next year.

What kind of profitability can we expect in the future? Back in June, Wedbush’s Ygal Arounian estimated EBITDA could soar to $260 million by 2022. But considering the company’s enterprise value ($12.3 billion), this implies a rich valuation.

Pinterest continues to improve monetization. The average revenue per user went up 29% YoY. The company has just started building out its international ad sales platform. With the bulk of users located outside of the United States, this implies a significant runway for growing the ad business.

PINS is also expanding beyond traditional online advertising. Thanks to AI technology, the company now has the capability to identify purchasable items in images hosted on the platform. This opens the door to another material revenue stream. These factors will be material in sustaining the current growth trajectory.

On an enterprise/sales (EV/Sales) basis, shares trade a premium to social media peers.  In addition, there is no guarantee PINS won’t stumble in its quest to grow. Let’s take a closer look at PINS stock valuation, and see how it stacks up to peers.

Pinterest Stock Richly Priced

Pinterest stock currently trades at an EV/Sales ratio of 13.3. This is in line with social media competitor Snap (NYSE:SNAP). Snap trades at an EV/Sales ratio of 13.3 as well. However, the other public social media names trade at lower valuations:

Facebook (NASDAQ:FB): EV/Sales of 7.6

Twitter (NASDAQ:TWTR): EV/Sales of 8.3

But Pinterest’s explosive growth may justify this. However, expectations of 50%+ growth over the next few years leaves little room for error. Shares could take a nosedive if the growth story faces a headwind.

What sorts of headwinds could PINS stock face? A new social media platform could gain critical mass, stealing share from Pinterest. Growth could cool sooner than expected. Even if PINS stock posts decent sales growth numbers (~20% range), based on the current share price this would be below expectations.

An additional downside risk is the end of the IPO lock-up period. Pinterest’s will expire on October 15. This means more insider shares could be sold, creating a negative short-term impact.

Pinterest Stock Has Gotten Ahead of Itself

Pinterest has tremendous growth potential. It continues to post 50%+ sales growth and has only started monetizing its overseas user base. The social media platform’s focus on consumer items is like catnip to advertisers. But the stock price seems has gotten ahead of itself. While the company has runway, it unlikely will become as big as Facebook or Twitter.

This could be due to the niche nature of Pinterest’s business. As InvestorPlace’s Josh Enomoto wrote on Oct. 2, women predominate Pinterest’s user base. Without a more diversified user profile, it may be hard for Pinterest to scale into a Facebook or Twitter-sized company.

On the other hand, I could be Pinterest being a takeover target for big tech. The social media companies could easily buy Pinterest, integrate its back-end into their existing infrastructure, and maximize the platform’s value.

A buyer such as Amazon (NASDAQ: AMZN) could use it as a vehicle to further grow its ecosystem. While the company sells at a high valuation, it may be worth the price for the right buyer.

But other than that, I am skeptical on Pinterest stock. Past results have been strong, but I can easily see grow start to cool once international monetization is complete. With slower growth, shares will either tread water or head lower. Add in the expiration of the IPO lock-up, and today does not sound like the time to buy PINS stock.

Keep Pinterest stock on your radar, but wait for lower prices for a better entry point.

As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.

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