Shares of Pinterest (NYSE:PINS) have plunged over the past few months, falling from above $30 to below $20, as the company’s nascent digital advertising business has slowed too much, too soon. Specifically, last quarter, Pinterest’s revenue growth rate, in a highly unusual development, dropped below 50%, while its guidance called for growth to fall below 40% next quarter.
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Investors freaked out, inferring from the slowdown that the digital ad market is simply too tough and too competitive for Pinterest to succeed in it. Those investors sold PINS stock in bunches. PINS stock price collapsed, losing about 50% of its value in a matter of three months.
But this selloff of Pinterest stock is a golden buying opportunity, and the most likely path forward for PINS stock is a huge rebound in 2020.
My rationale is simple. Pinterest had a bad quarter. That’s not the norm. It’s an outlier. Next year, Pinterest will get back to reporting very good quarters. A streak of really good quarters in 2020 will help propel PINS stock — which is significantly undervalued at its current levels — way higher. Indeed, this stock seems positioned to rally back to $30 over the next 12 months.
That would be a gain of nearly 70%. That’s huge, and it’s too much potential to pass up on now. As a result, I think now is the time to buy PINS stock on weakness and wait for a huge 2020 rally.
Pinterest Will Bounce Back
The company’s fundamentals indicate that PINS stock is due for a huge rebound in 2020 as its growth outlook regains momentum.
Pinterest reported bad Q3 results, with its revenue growth meaningfully slowing. That’s natural for an early-stage company, especially one whose revenues are growing at a 50%-plus pace.
There are always a few quarters here and there that don’t meet expectations. Sometimes those bad quarters are a sign of the times and provide a good reason to sell the stock. Other times, those bad quarters are simply minor hiccups and create good buying opportunities.
The latter scenario has unfolded for Pinterest. PINS still has a ton of global users (it has over 320 million global users; that’s bigger than pretty much everyone besides Facebook (NASDAQ:FB). It’s also growing its global user base at a healthy pace, as its year-over-year user growth last quarter came in at 30%. That’s the highest among the publicly traded social media companies.
And, perhaps most importantly, those users are significantly under-monetized. Pinterest’s average revenue per user rate is 90 cents, a fraction of the $6-plus rates of Twitter (NYSE:TWTR) and Facebook.
Also of note, ads make perfect sense on Pinterest and should have high click rates because the platform is already a feed of recommended products and services, packaged into pretty visuals. So they’re very similar to ads.
The core fundamentals of Pinterest’s digital ad business remain highly favorable. As a result, last quarter was an outlier, not the norm. The norm is sustained high growth. Thanks to various initiatives, like making Pinterest more “shoppable” through a partnership with Shopify (NYSE:SHOP), Pinterest’s high growth should return in 2020. As it does, investors will regain confidence in its growth outlook and PINS stock will bounce back.
Pinterest Stock Is Undervalued
Pinterest stock could rally tremendously in 2020 because PINS stock is extremely undervalued.
Pinterest will close the year with about 340 million monthly active users, up more than 40% from last year. Pinterest should sustain decent user growth in the 5%-10% range, thanks to non-cyclical tailwinds such as a pivot towards artistic digital media products. Realistically, Pinterest should be able to reach about 500 million monthly active users by 2025.
Based on management’s revenue guidance, PINS’ 2019 average revenue per user will be around $3.25. That’s up 14% from a year ago. Pinterest should sustain double-digit growth going forward because: 1) Its ARPU rate is well below that of its bigger peers 2) Pinterest is a good website for ads, given its visual-oriented, product-oriented platform, and 3) more and more dollars are shifting into digital ads every day. Assuming Pinterest’s ARPU increases at a sustained 15%-20% rate, Pinterest’s ARPU could come in around $8.50 by 2025.
An $8.50 ARPU on 500 million users would produce revenue potential of $4.25 billion in 2025. During this stretch, its gross margins should climb towards 80%, which is average for the digital ad sector.Finally, its operating spending rate should be driven down towards 50%, which is closer to average for the digital ad sector.
Under those assumptions, Pinterest has a realistic and visible opportunity to grow its earnings per share to $2.25 by fiscal 2025. Based on a forward price-earnings multiple of 21,,which is average for technology stocks and a 10% annual discount rate, that equates to a 2020 price target for PINS stock of over $30.
The Bottom Line on PINS Stock
Pinterest is a great company that had a bad quarter. As a result, the recent weakness of PINS stock is an opportunity to buy the shares on weakness. In 2020, Pinterest will get back to reporting good quarters, and as it does, its shares will rebound tremendously.
As of this writing, Luke Lango was long PINS, FB, and SHOP.
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