- Bear markets can create opportunities to buy good stocks on sale.
- Pinterest's shares are 74% of last year's high.
- New management and a return to revenue and earnings growth could be upside catalysts this year.
The historical path of the stock market is up and to the right, but it doesn’t travel this path in a straight line. Instead, it can lurch, stall, rally, and fall along the way. So, while the stock market performed lousily last year, take solace in knowing bear markets are common.
For perspective, there have been 26 bear markets since 1929, so the average investor can expect to experience about 14 of them over a 50-year timeframe, according to Hartford Funds.
As terrible as bear markets feel, they have an upside. Many stocks wind up trading at a depressed valuation, allowing investors to pick them up for portfolios “on the cheap.”
The challenge, of course, is figuring out what stocks are worth buying. Fortunately, that’s a bit easier, thanks to Real Money contributors like Eric Jhonsa, whose beat is technology. Jhonsa’s been scouring the sector for bargains worth buying, and he made the case for Pinterest (PINS) this week.
In "6 Reasons to Like Pinterest's Risk/Reward Going Into 2023," he offers six reasons why it’s an excellent time to add this social media stock to portfolios.
“Pinterest (PINS) isn't the only beaten-up tech stock that I think could deliver good returns in 2023. But I think it's fairly unique in terms of how many potential upside catalysts it has.
Here are a few reasons why I think Pinterest's risk/reward looks attractive heading into the new year.
1. The Company Has a New CEO with a Compelling Vision
While at Google, Ready's team did a good job of overhauling Google's shopping and payments services. And though his tenure at Pinterest is still in its early days, Ready has been outlining a compelling vision of attracting more publishers and content creators to Pinterest, growing video sharing and viewing, and (perhaps most importantly) making it possible to buy just about any consumer product that a user might see while searching or browsing Pinterest (for a closer look at how Ready is thinking about evolving Pinterest, see his commentary at a September Goldman Sachs tech conference).
2. User Growth/Engagement Is Improving
After recording annual declines of 45 million and 22 million, respectively, in the first and second quarters of 2022, Pinterest's monthly active users (MAUs) rose by 1 million annually and 12 million sequentially in the third quarter to 445 million (a double-digit annual increase in Gen Z users helped drive this growth). And for the fourth quarter, the FactSet consensus is for MAUs to be up 5 million sequentially and 19 million annually to 450 million.
Third-party data also points to improving user engagement trends. In October, Morgan Stanley -- citing data from mobile analytics firm Sensor Tower -- reported that Pinterest's iOS time spent per user per day in the U.S. rose 13% annually in Q3, following just 2% growth in Q2 and an 8% decline in Q1. And Sensor Tower's data currently shows Pinterest at #34 on the App Store download leaderboard after having generally been in the 50s in recent months.
Pinterest's U.S. engagement growth improved a lot in Q3. Sources: Morgan Stanley, Sensor Tower.
3. An Activist Investor With a Very Strong Track Record Is on Board
Elliott Management, which has a storied history when it comes to investing in and driving changes at tech companies, was reported in July to have taken a 9%-plus stake in Pinterest. More recently, Pinterest announced that Elliott portfolio manager Marc Steinberg is joining its board as part of a "long-term cooperation agreement" with Elliott.
The cooperation agreement makes it unlikely that Elliott will push hard for a sale of Pinterest in the near term (though the firm was apparently open to a sale effort a few months ago). But as others have argued, Elliott could push Pinterest, which had $2.7 billion in cash and no debt as of September, to launch a stock buyback. It could also lean on Pinterest to run a tighter ship following several quarters of big increases in R&D and sales and marketing spending.
4. There's Still a Lot of Room to Improve Monetization
As a platform that's used by people to discover products and assist with do-it-yourself projects, Pinterest lends itself well to both brand advertising and e-commerce. And with a third-quarter average revenue per user (ARPU) of just $1.56 ($6.12 in the U.S. and Canada, but just $0.72 in Europe and a mere $0.11 elsewhere), there's still a lot of headroom for Pinterest to grow its top line even if it doesn't see much user growth.
Ready certainly seems aware of this. Among other things, Pinterest recently launched a shopping API that lets merchants upload product catalogs and price/inventory data, is creating integrations with major e-commerce and payments platforms, and is looking to use machine learning to automatically tag products within shared content (with users then able to buy the products by clicking on a link). Such efforts should help drive ARPU meaningfully higher in the coming years.
5. Digital Ad Spend Might Be Better Than Feared in 2023
While estimates vary, little or no growth is generally expected for digital ad spending in 2023, with the consensus being that macro pressures will lead many ad budgets to be further tightened. And the shares of online/mobile ad sellers (Pinterest included) have, by and large, priced in such near-term pessimism.
But while there's no denying that the macro backdrop isn't ideal, it's perhaps not quite as bleak as feared. With the help of elevated savings and a structurally tight labor market, consumer spending and the job market have both proven more resilient than what many expected in early/mid-2022 - and it's hardly a given that such resilience will vanish in early 2023, especially since inflation is now moderating a bit. Meanwhile, as the likes of Alphabet (GOOGL) and Meta Platforms (META) will attest, a lot of ad-budget cuts have already happened.
Throw in ongoing share gains by digital ad platforms from offline platforms such as print, radio, and linear TV (happening in both good times and bad), as well as the potential easing of headwinds to mobile ad sales caused by Apple's (AAPL) user-tracking policy changes, and 2023 might not be such a terrible year for digital ad spend, even if it's not a great one either.
6. The Valuation Isn't Too Demanding
Pinterest currently sports an enterprise value (EV - market cap minus net cash) equal to 31 times a 2023 free cash flow (FCF) consensus of $484 million. While that figure doesn't make Pinterest look especially cheap, it's worth keeping in mind that shares trade for only 20 times reported 2021 FCF of $744 million and that Pinterest's revenue is expected to be up 25% from 2021 to 2023.
The company's aggressive spending -- done in part to help it make good on its large commerce opportunity -- is depressing FCF for now (it's expected to total just $403 million in 2022). But with Elliott now on board and Ready stating on the Q3 earnings call that Pinterest aims to "return to meaningful margin expansion" in 2023, the company looks poised to strongly grow FCF in the coming years.”
The Smart Play
Pinterest isn’t expected to deliver barn-burning growth, but that could change if new leadership can better crack the code to tapping consumers' wallets. Its new CEO has some impressive chops in the digital payments/e-commerce space, so it may be worth giving him the benefit of the doubt. It appears some institutional buyers agree. The number of institutional funds owning Pinterest rebounded to 1392 in December from 1269 in June, according to Marketsmith.
There’s always the chance that because Pinterest is debt-free and Eliot owns a big stake, the company could be back up for sale again. However, I prefer buying companies for other reasons and consider takeovers gravy.
In this case, it’s encouraging that analysts are increasingly optimistic Pinterest could find its footing. Analysts expect earnings per share will finish 2022 at $0.61 before rebounding to $0.74 in 2023. Those estimates have increased, rather than decreased, over the past 90 days. That’s a good sign, given most stocks are experiencing downward rather than upward revisions lately. It’s also encouraging that while revenue only grew 8% year over year in the third quarter, analysts think revenue growth will reaccelerate to nearly 15% in 2023.
The company's balance sheet isn't too worrisome, given its current ratio is an impressive 9.5. The current ratio is a liquidity measure of current assets to current liabilities. The higher the ratio is above 1, the more desirable.
Shares are arguably still a bit rich at 32x next year’s estimates, but that’s not nearly as pricey as in 2021 when shares eclipsed $89, and EPS was $1.13. I'd be OK with this multiple if I were comfortable that a strong economy would result in further upward revisions. However, there’s too much economic uncertainty to think that. As a result, its P/E is high enough to make me want to keep a tight leash on position size and use a stop loss.
For this reason, consider taking a starter position and then add to it opportunistically as long as it remains above its 200-day moving average. For example, suppose you're normal position weight is 3%, you could buy 1% now and then increase it from there as conviction grows. Then, if it breaks below the 200-DMA, a stop loss below $22 (October’s low) could be wise to protect yourself against a big loss.