AI-Powered Growth And Global Expansion Propel Ad Revenue And User Engagement

Key Takeaways

• Pinterest's AI-driven strategy for content personalization is set to enhance user engagement and attract advertisers, likely boosting revenue and user base growth.
  
• Global expansion and new features targeting Gen Z are expected to diversify revenue and increase engagement, potentially improving monetization and earnings.
  
• Challenges in ad revenue growth due to complex ad tools, macroeconomic pressures, stagnant US user growth, declining ad pricing, and over-reliance on few key verticals.

Catalysts

Operates as a visual search and discovery platform in the United States and internationally.

• Pinterest's strategy of leveraging AI for increased relevance and personalization in content recommendations is expected to drive a sustained user engagement and growth, enhancing platform attractiveness for advertisers which might result in increased revenue and user growth.
  
• Investing in lower funnel advertising solutions has proven effective, with Pinterest reporting significant improvements in monetization through enhanced clicks and conversions, likely impacting revenue growth and net margins positively.
  
• The introduction of Performance Plus, offering AI and automation tools for advertisers, could simplify campaign setups and improve efficiency, potentially increasing advertising spend on the platform and boosting revenue.
  
• Global expansion and penetration into untapped markets, supported by partnerships and third-party demand, are likely to contribute to Pinterest's revenue diversification and growth prospects in the long term.
  
• Pinterest’s focus on curation and actionability through new features like board sharing and collages caters to the evolving user behaviors, especially among Gen Z, potentially driving higher engagement and monetization opportunities which could positively affect net margins and earnings.

Assumptions

• Analysts are assuming Pinterest's revenue will grow by 16.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.8% today to 15.8% in 3 years time.
• Analysts expect earnings to reach $827.1 million (and earnings per share of $1.12) by about October 2027, up from $192.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $573.7 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 46.4x on those 2027 earnings, down from 120.3x today. This future PE is greater than the current PE for the US Interactive Media and Services industry at 23.2x.
• Analysts expect the number of shares outstanding to grow by 2.33% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.87%, as per the Simply Wall St company report.

Risks

• If advertisers struggle to see the performance improvements in their measurement tools or find the platform's ad setup and optimization too complex, Pinterest could face challenges in convincing a wider range of advertisers to increase spending, impacting ad revenue growth.
  
• A tougher macroeconomic environment might dampen overall ad spending, including on Pinterest, potentially slowing revenue growth despite the platform's improved ad products and tools.
  
• Although Pinterest has made significant product improvements, a lack of a substantial acceleration in U.S. user growth could limit the platform's appeal to advertisers focused on reaching larger or faster-growing audiences, impacting ad revenue.
  
• The decline in ad pricing (eCPM) due to the expansion into smaller, under-monetized markets with third-party partnerships could pressure overall ad revenue margins if the increase in ad impressions doesn't offset the lower price points.
  
• Continued reliance on a few key verticals, such as retail, for ad revenue growth might expose Pinterest to sector-specific downturns, impacting revenue if diversification into other verticals like technology, autos, and financial services doesn't accelerate.

Valuation

• The analysts have a consensus price target of $42.75 for Pinterest based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $52.0, and the most bearish reporting a price target of just $32.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $5.2 billion, earnings will come to $827.1 million, and it would be trading on a PE ratio of 46.4x, assuming you use a discount rate of 6.9%.
• Given the current share price of $33.67, the analyst's price target of $42.75 is 21.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.