AI And Performance+ Tools Will Advance Ad Strategies Amid Risks

Key Takeaways

• Leveraging AI and enhancing platform shopability could drive user engagement and positively impact revenue and margins.
  
• Expanding monetization through international growth and new verticals presents opportunities for diversified revenue and earnings growth.
  
• Declining ad pricing and reliance on lower funnel conversions could pressure revenue growth and profit margins amid emerging vertical penetration challenges.

Catalysts

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

• Management plans to continue leveraging AI and unique first-party signals to deliver personalized user experiences, which could enhance user engagement and drive revenue growth over time.
  
• The focus on improving the shopability and actionability of the platform aims to enable users to seamlessly transition from inspiration to action, potentially increasing conversion rates and impacting net margins positively.
  
• Investments in the lower-funnel advertising tools, such as the Performance+ product suite, are expected to streamline advertiser experiences and improve return on ad spend, which may contribute to earnings growth.
  
• The company is expanding its monetization efforts by diversifying demand through international growth and third-party partnerships, which could bolster overall revenue and offset any regional weaknesses.
  
• Pinterest's focus on growth in emerging verticals such as financial services and technology and improving ad platform efficiencies presents opportunities for revenue diversification and margin enhancement.

Pinterest Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Pinterest compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Pinterest's revenue will grow by 9.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 51.1% today to 10.6% in 3 years time.
• The bearish analysts expect earnings to reach $511.0 million (and earnings per share of $0.71) by about April 2028, down from $1.9 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 52.2x on those 2028 earnings, up from 9.2x today. This future PE is greater than the current PE for the US Interactive Media and Services industry at 16.9x.
• 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

• The presence of risks and uncertainties in forward-looking statements could lead to actual results diverging from guidance, potentially affecting earnings and profit margins.
  
• The company’s revenue growth may be impacted by ongoing softness in the food and beverage sector, a significant subsector within consumer packaged goods.
  
• The decline in ad pricing by 18% year-on-year might pressure net revenues and lower profit margins despite increased ad impressions.
  
• Heavy reliance on lower funnel conversion objectives indicates that any performance issues in these ad products could adversely affect revenue growth and profitability.
  
• As the majority of growth is led by first-party demand, any failure to deepen penetration in emerging verticals like financial services and technology could stagnate future revenue opportunities.

Valuation

• The assumed bearish price target for Pinterest is $32.57, which represents one standard deviation below the consensus price target of $40.03. This valuation is based on what can be assumed as the expectations of Pinterest's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• 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 bearish analysts, you'd need to believe that by 2028, revenues will be $4.8 billion, earnings will come to $511.0 million, and it would be trading on a PE ratio of 52.2x, assuming you use a discount rate of 7.4%.
• Given the current share price of $25.32, the bearish analyst price target of $32.57 is 22.3% 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.