Pinterest stock: time to buy?

Visual search shares and media platform Pinterest (NYSE: PINS) jumped several percentage points on Friday, following a strong fourth-quarter update. Despite the upward movement in the stock, there is likely still substantial room for this stock to rise even further in the long term.

Here’s a detailed look at this growth stock, its underlying business dynamics, and why you might want to consider adding it to your portfolio.

Image source: Getty Images.

An incredible momentum

Come back in October and you might remember that Pinterest announced a stellar quarterback after a slowdown in coronavirus-related ad spending in the second quarter. After growing revenue by just 4% year-over-year in the second quarter, Pinterest’s revenue growth accelerated to 58% in the third quarter. In addition, the management has guided so that the income of the important vacation quarter increases by approximately 60% year on year.

But Pinterest over-delivered, increasing its fourth-quarter revenue 76% year-over-year to $ 706 million.

Put Pinterest’s current growth path into perspective. Consider how it differs from Facebook (NASDAQ: FB) and Alphabet (NASDAQ: GOOGL). The two companies saw their fourth-quarter advertising revenue increase 22% and 31%, respectively, in the fourth quarter.

Massive user growth is at the heart of Pinterest’s business. The company added over 100 million monthly active users (MAUs) in 2020, with total MAUs increasing 37% year over year. This compares to Facebook’s 14% growth in unique monthly users across all of its social platforms.

Image source: Pinterest.

A reasonable assessment

While it’s easy to see why Pinterest is a great company with a lot of potential, the same can’t be said for the company’s stock – at least not based on surface-level analysis. Pinterest has a market capitalization of around $ 50 billion, but is only now getting into generally accepted accounting principles (GAAP) profitability. Meanwhile, the company is trading at around 30 times its sales.

But don’t be fooled by these high valuation indicators. Consider the following two ideas.

As the company reaches a large scale, its adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) increase rapidly. In Q4 2020, this key profitability metric, which measures adjusted EBITDA profit as a percentage of sales, was 42%. This was an increase from just 19% in the quarter last year. For the full year, it was 18%, down from 1% in the last year’s quarter. As that profit margin continues to widen, Pinterest will likely see significantly disproportionate growth in profit relative to revenue.

Second, investors should take the time to appreciate the new accelerated dynamics of the business. Not only did the fourth quarter mark a substantial increase in growth, management also expects huge growth in the first quarter of 2021, with the company guiding revenue growth at a year-over-year rate in the low range of 70% – well ahead of average analysts’ forecast for growth of 56.5% over the period.

The verdict

So, is now a good time to buy Pinterest stocks, despite the stock rally on Friday? For investors looking to hold the stock for the long term, I think it’s not too late to get into this growth stock.

Of course, there is no guarantee. Among other risks, competition from Pinterest could prove to be more competent than expected and digital advertising could pose unforeseen challenges. Additionally, any investor buying the stock today should expect a lot of volatility.

Despite the risks of the stock and its recent price appreciation, stocks seem like a good bet in the long run.