Focus On AI And Partnerships Will Enhance User Experience But Execution Risks Persist

Key Takeaways

• Strategic investments in AI and ad tools enhance user engagement and advertiser performance, boosting revenue through increased ad impressions and spend.
  
• Monetizing international growth and improving shoppability drive global revenue diversification, increasing conversions and competitive position in digital advertising.
  
• Pinterest faces risks from shifts in ad pricing, sector dependence, AI reliance, international expansion challenges, and potential cost inefficiencies in R&D investments.

Catalysts

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

• Pinterest's strategic investment in AI and the development of their Taste Graph enhance the personalization and relevance of user experiences. This bolsters user engagement and revisitation, potentially leading to increased ad impressions and higher revenue.
  
• The expansion and optimization of lower-funnel advertising tools, including Performance+, are expected to improve advertiser performance and efficiency, which could lead to higher ad spend and boost Pinterest's earnings.
  
• Pinterest's emphasis on monetizing international growth and partnerships, such as those with Amazon Ads and Google, could diversify and increase global revenue streams, positively impacting overall revenue growth.
  
• The company's focus on shoppability and actionability, particularly through enhanced shopping experiences and holiday promotions, is likely to drive more user actions and increase conversion rates, contributing to higher revenue and margins.
  
• Continued investment in AI-driven ads and personalization is expected to improve ad relevance and effectiveness, supporting higher ROAS for advertisers. This should enhance Pinterest's competitive position in the digital advertising market and drive revenue and earnings growth.

Pinterest Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Pinterest's revenue will grow by 15.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 51.1% today to 16.9% in 3 years time.
• Analysts expect earnings to reach $943.2 million (and earnings per share of $1.29) by about April 2028, down from $1.9 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.3 billion in earnings, and the most bearish expecting $754.5 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 39.2x on those 2028 earnings, up from 9.0x today. This future PE is greater than the current PE for the US Interactive Media and Services industry at 15.4x.
• Analysts expect the number of shares outstanding to decline by 0.72% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.4%, as per the Simply Wall St company report.

Pinterest Future Earnings Per Share Growth

Risks

• Pinterest's increase in ad impressions while experiencing a decline in ad pricing suggests a shift in auction mix, which could pressure overall global platform pricing and impact revenue growth.
  
• Dependence on the resilience of sectors like retail and emerging verticals such as technology and financial services, with softness already noted in food and beverage, could impact long-term revenue sustainability if these sectors face headwinds.
  
• Heavy reliance on successful integration and innovation in AI and machine learning for both user experience and advertising effectiveness creates technology and execution risks that could affect earnings if results do not meet expectations.
  
• The significant role of international expansion and third-party advertising partnerships in growth projections introduces geopolitical, operational, and competitive risks that could affect margins if not managed effectively.
  
• Aggressive investment in R&D, particularly in AI and product development, while aiming for profitable growth and margin expansion, may risk cost overruns or inefficiencies that could impact net margins.

Valuation

• The analysts have a consensus price target of $45.017 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 $55.0, and the most bearish reporting a price target of just $25.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $5.6 billion, earnings will come to $943.2 million, and it would be trading on a PE ratio of 39.2x, assuming you use a discount rate of 7.4%.
• Given the current share price of $24.68, the analyst price target of $45.02 is 45.2% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.