Pinterest’s growth story is over (NYSE:PINS)

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First we put Pinterest (NYSE: PINS) in the danger zone in October 2020 and reiterated our view in November 2020 and August 2021. Since our initial report, the stock has outperformed 69% as a short against the S&P 500, down 55% while the S&P rose 15%. Investors may think it’s time to buy the dip – we disagree. Pinterest’s 1Q22 earnings and guidance indicate that the record performance in 2021 was an anomaly. The company’s current fundamentals cannot justify the expectations, as quantified in our DCF model, in its share price.

Pinterest’s stock could fall further depending on:

  • slower revenue growth
  • tempered expectations for user growth
  • expenses are growing faster than revenues, driving down profitability
  • the stock’s current valuation implies that Pinterest will maintain record margins despite indications to the contrary and grow monthly active users (MAU) to more than half of Facebook’s (META)

Figure 1: 69% outperformance in the danger zone: 10/26/20 to 05/20/22

PIN Performance vs. S&P 500

PIN Performance vs. S&P 500 (New Constructions, LLC)

What works

Top Line Improvement: Pinterest grew revenue 18% year-over-year (YoY) in 1Q22, and its trailing year (TTM) revenue is the highest in company history. Additionally, Pinterest’s average revenue per user (ARPU) improved year-on-year in each of its three geographies, US & Canada, Europe, and Rest of the World. Unfortunately for Pinterest investors, the top line was one of the few bright spots in 1Q22, and even it had some holes, as we’ll show below.

Othe hat does not work

End of the growth story: While Pinterest has benefited, much like other tech and home stocks during and after the COVID-19 pandemic, that boost is fading. Growth rates for many key indicators, while still positive, have fallen in recent quarters. According to Figure 2, revenue grew only 18% YoY in 1Q22, compared to 78% YoY in 1Q21. Similarly, revenue grew 125% YoY in 2Q21, while management guided only 11% YoY growth in 2Q22.

Figure 2: Year-over-year revenue growth rate: 1Q21 to 2Q22

PINS revenue growth rate since 1Q21

PINS revenue growth rate since 1Q21 (New Constructions, LLC)

Pinterest is also losing users. Pinterest’s total MAUs fell from 478 million in 1Q21 to 433 million in 1Q22, or 9%. The composition of user decline is particularly alarming. See Figure 3. In the US and Canada (Pinterest’s most profitable markets), MAUs are down 13% and MAUs in Europe are down 12%. Pinterest Rest of the World MAUs were only down 6%, but this market generates the lowest average revenue per user.

Figure 3: Monthly Active Users: 1Q21 to 1Q22

PINS MAU year after year

PINS MAU year after year (New Constructions, LLC)

Profitability already down: With record revenue and MAUs during and after the COVID-19 pandemic, Pinterest has also generated record profitability. Its net operating profit after tax (NOPAT) margin was 15% and its return on invested capital (ROIC) was 28% in 2021. This record performance has the dubious distinction of being the first year in which Pinterest generated a positive NOPAT and ROIC margin.

Already, we are seeing a sharp decline in earnings, with the company’s NOPAT margin falling to -0.1% in 1Q22.

Profitability won’t improve anytime soon: The bulls will say that 1Q22 represents a blow and that Pinterest will return to profitability going forward. However, the company’s own management warns against such optimism. In its 1Q22 earnings release, management noted that non-GAAP operating expenses (which are adjusted and lower than GAAP operating expenses) are expected to increase 35-40% year-over-year in 2022. time, consensus estimates call for revenue growth of just 18% year-over-year. . The basic math points to shrinking margins and matches Pinterest’s long history of operating losses versus a single year of profit.

Management is already tempering user growth: Investors hoping YoY MAU growth is just around the corner should think again. Pinterest management explicitly tried to temper expectations during the 1Q22 earnings call:

“As you think about MAUs for the second quarter, I’d like to provide some additional context. The second quarter has always been our weakest seasonal quarter for MAUs, as people tend to be more on the outdoors, travel more, and engage less often in our core use cases.

Unfortunately for investors, Pinterest is rated for significant MAU growth and above-consensus revenue growth, as we’ll show below.

Pinterest’s price is half the size of Facebook

We use our inverse discounted cash flow model to analyze future cash flow forecasts built into Pinterest’s current valuation. We find that, despite management’s warnings about MAU growth and overall profitability, Pinterest is being priced as if it will maintain record margins and grow MAUs to half that of Facebook.

To justify its current price of $23/share, our DCF model indicates that Pinterest should:

  • improve its NOPAT margin to 15% (record in 2021, already fallen to 14.5% on the TTM) and
  • increase revenues by 20% per year until 2028.

In this scenario, Pinterest would generate $9.2 billion in revenue in 2028, or 3.5 times its TTM revenue. At its current annual ARPU[1]($5.86 at the end of 1Q22), this scenario implies that the company would have nearly 1.6 billion MAUs, or 3.6x its 1Q22 MAUs and 54% of Facebook’s 1Q22 MAUs.

We think it’s overly optimistic to assume that Pinterest will recoup its record 2021 margins (as it heads into lower profitability) and grow MAUs by 3.6x. Companies that grow revenue by more than 20% per year for such a long period of time are extremely rare, underscoring the unrealistic optimism embedded in Pinterest’s stock price. In a more realistic scenario, detailed below, the stock presents significant downside risk.

43% decline if Pinterest grows at consensus rates

Below, we run through an additional DCF scenario to highlight the stock’s downside risk.

If we assume that Pinterest:

  • The NOPAT margin is 10% from 2022 to 2028,
  • revenue grows at consensus rates of 18% in 2022, 23% in 2023 and 19% in 2024, and
  • revenue grows by 15% per year in 2025-2028, then

the stock would be worth $13/share today, down 43% from the current price. Even if we assume that Pinterest can increase its ARPU by 1.5 times the current level, this scenario implies that the company has 884 million MAUs, or 2x its MAU TTMs. If Pinterest’s profitability doesn’t improve from 1Q22, or if growth slows further, the stock’s downside risk is even higher.

Figure 4 compares Pinterest’s implied future NOPAT in these scenarios to its historical NOPAT. We also include the NOPAT TTM for Twitter and Snap (SNAP) for reference.

Figure 4: Pinterest Historical and Implied NOPAT: DCF Valuation Scenarios

DCF PINS Implicit NOPAT

DCF PINS Implicit NOPAT (New Constructions, LLC)

Each of the above scenarios also assumes that Pinterest’s change in invested capital equals 6% of revenue each year. This growth in invested capital represents half of Pinterest’s average change in invested capital as a percentage of revenue over the past four years. If we assume that Pinterest’s invested capital grows at a similar rate to previous years, the downside risk is even greater.

This article originally published on May 23, 2022.

Disclosure: David Trainer, Kyle Guske II, and Matt Shuler receive no compensation for writing about a specific stock, industry, style, or topic.

[1] Calculated as TTM revenue of $2.7 billion divided by average MAUs at the beginning and end of the period (from 1Q21 to 1Q22).

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