On Friday, Pinterest shares soared 18% on the back of Q2 2019 results that beat on the top and bottom lines, combined with a raise on the company’s full-year guidance. Nevertheless, this stock finds itself so overvalued, that’s it’s now beyond priced for perfection.

Highly Compelling Vision Ahead

Pinterest is an exciting young platform, which does not wish to be labeled as a social media platform. In actuality, Pinterest’s vision is on being the first place where people come for inspiration, to discover and learn. What’s more, underneath all this, there is indeed a terrific business, too.

Case in point, despite a rise in Pinterest’s ad pricing, this did not deter a huge increase in the number of advertisers coming onto its platform. Moreover, digging into Pinterest’s ARPU (average revenue per user) driver, it is based off a combination of a natural flow of new brands coming onto its platform, as well as Pinterest getting more wallet share from its more mature brands on the platform. Altogether, this highlights a very strong tailwind for Pinterest.

Pinterest Continues to Diversify

We are now seeing Pinterest’s opportunity diversifying into new verticals. Last quarter, there were early discussions about Pinterest’s attempt at getting auto companies onto its platform. Then, this quarter, Pinterest discussed how Toyota  (TM – Get Report)  has now signed up for its platform.

Furthermore, Pinterest is now more than straightforward pins of pictures. Pinterest is seeing great success with video formats, too. Video is resonating very strongly with users for certain interests, such as recipes, exercise, do-it-yourself, general learnings and research activities. Furthermore, Pinterest’s improved analytics tools are helping advertisers to measure their performance better.

Sizzlingly Revenue Growth

The graph depicts a remarkably boring straight line. It represents a company which is easily clearing 40% revenue growth rates. The question is how long can Pinterest continue to grow at this pace? And the answer is that nobody really knows. But even if Pinterest were to slow down going into 2020, it’s difficult to foresee Pinterest slowing to below 20% revenue growth rate.

Having said that, the question investors need to be asking, is not whether Pinterest will continue to grow its revenues at north of 20% or even 40%, but what sort of profit margins will Pinterest carry in the future? And the next question should be, can an investment case be made that its future earnings are not already priced in?

Valuation – No Margin Of Safety

Presented above is the real crux of the problem for investors. Many times there are stocks that we absolutely love the feel and the narrative of, but to be an outstanding investor, investors need to be be cold, rational and highly selective. Investing in Pinterest because it is a new company with rapid growth, backed by a compelling narrative is not helpful in growing one’s savings if the investment is done at the wrong price.

As the table highlights, Pinterest is, by a considerable margin, the most expensive peer which derives its revenues from advertising. One could argue that Pinterest has no political overhang risk, unlike Facebook and Alphabet, but that same assertion could be made about Twitter (TWTR – Get Report) .

Finally, paying up more than 20x trailing revenues for a company with no history of turning GAAP profit, and unlikely to do so for a considerable amount of time, amounts to nothing more than a speculative urge, which rarely translates into a wise investment.

The Bottom Line

Pinterest has a very strong and compelling value proposition. The challenge for investors is that it becomes difficult to claim that this insight has not already been priced in. At $18 billion market cap, investors will struggle to find any sort of new insight which has not already been priced in.


Source: Pinterest Is a Great Company But Its Stock Is Dangerously Overvalued