Pinterest’s Next 20% Won’t Be Easily Obtained But It's a Buy Nonetheless

Pinterest (PINS) reported Q2 2022 earnings on Aug. 1 after the markets closed. The results showed enough good news to send PINS higher in the next day’s trading. Up more than 20% in the past five days, the next 20% won’t be nearly as easy to come by. 

That doesn’t mean you should pass on the social media platform. Down almost 63% over the past 52 weeks, new CEO Bill Ready aims to turn Pinterest into a financially disciplined e-commerce powerhouse. 

That’s good news for anyone who bought Pinterest last July -- and is still holding -- when it was trading near $80. 

I like its chances to return to $80 over the next 24-36 months. Here’s why I feel this way. 

Pinterest Has a New Boss

Bill Ready became CEO on June 29, replacing co-founder Ben Silbermann, who became Executive Chairman. The company’s Q2 2022 earnings report was Ready’s first as the company’s chief executive. Ready wasted no time making friends with investors. 

“Given the growth that we are seeing combined with the significant potential opportunity ahead of us, we are continuing to invest in the business this year. And Todd [CFO Todd Morgenfeld] will give more detail on that, but it’s worth saying that I do not subscribe to a ‘growth at all costs’ mentality,” Ready stated in its Q2 2022 conference call. 

“While I believe we need to invest in long-term growth, I also believe that constraints breed creativity and can lead to even better product outcomes.”

As part of Ready’s plan to cure what ails Pinterest, the CEO and CFO reiterated during the call that the back half of 2022 will see an accelerated investment in its business so that margins are in a position to grow in 2023 and beyond. 

In the question and answer portion of its conference call, Morgenfeld said that it could see as much as a 200 basis-point increase in margins heading into 2023. In the second quarter, its EBITDA margin was 14%, suggesting 16% going into next year. 

Based on the average analyst revenue estimate for 2023 of $3.37 billion, investors can expect $539 million in EBITDA or more in 2023. In the trailing 12 months ended June 30, it was $320 million, providing 68% EBITDA growth over the next 18 months.

That’s not half bad.  

A Focus on Shopping Ought to Pay Dividends

Ready wants to accomplish two things over the next 18 months. 

First, he wants to make Pinterest a compelling shopping destination. Morgenfeld discussed the subject in the conference call.

“So getting 1 billion products into the system, which came on the back of high-performing partnerships with Shopify and WooCommerce and with our merchants who are increasingly using our API to get real-time inventory with real-time pricing into the system, that’s been really powerful in building the inventory we need to serve against a user’s interest or intent,” the CFO stated. 

Pinterest wants to take the shopper from inspiration and intent to action by ensuring it has a lot of shoppable inventory. It used to be that Pinterest could provide plenty of inspiration, but then the user would have to go elsewhere. 

Introducing Your Shop and integrating The Yes acquisition into the Pinterest shopping experience can accelerate its shopping ads revenue. In Q2 2022, its shopping ads grew twice as fast as its overall revenue.

Ready wants to build a platform that allows its 433 million users to engage more deeply with retailers and brands. It’s not all about buying. There are many ways to draw your users in, and they will evolve as people’s shopping behaviors change over time. 

In the CEO’s Q2 2022 shareholder letter, Ready said that the company’s machine learning systems have improved at making personalized recommendations, putting its Idea Pins front and center on the home feed. 

Machine learning and artificial intelligence will only enhance the user’s shopping experience as it continues to increase the shoppable inventory on the platform.

The Bottom Line on Pinterest Stock

Activist investor Elliott Management is now the company’s largest shareholder. It went to bat for Ready on Aug. 1, suggesting the new CEO is the right person to take Pinterest to the next level.

“Pinterest is a highly strategic business with significant potential for growth, and our conviction in the value-creation opportunity at Pinterest today has led us to become the Company's largest investor,” Elliott’s Aug. 1 press release stated. 

“As the market-leading platform at the intersection of social media, search and commerce, Pinterest occupies a unique position in the advertising and shopping ecosystems, and CEO Bill Ready is the right leader to oversee Pinterest’s next phase of growth.”

I believe as Elliott does, that Pinterest is in the early stages of its second wave of growth, one that is far more popular. 

Are there headwinds to face in the weeks and months ahead? You bet there are. However, with Ready in charge, Pinterest has acknowledged it needed someone with e-commerce chops to get it to the next stage of growth. 

It won’t be easy going from $22.40 to the high $20s over the next few months. But the risk/reward proposition remains in a patient investor’s favor. I can see Elliott doing very well on their significant investment.

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