Performance+ And AI Ads Will Expand Global Reach Despite Risks

Key Takeaways

• Strategic focus on AI-driven user engagement and ad performance is expected to boost monetization and revenue growth.
  
• International expansion diversifies revenue streams, reducing dependence on the North American market.
  
• Pinterest's growth relies on successful scaling of AI advertising tools and international expansion amidst execution risks and market-specific challenges.

Catalysts

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

• Pinterest's strategic focus on enhancing user actionability and curation is expected to drive deeper user engagement, which could lead to increased user revisitation and ultimately boost revenue growth.
  
• By leveraging AI to integrate more first-party data into advertising and user experience, Pinterest aims to improve ad relevance and performance, which is likely to increase advertiser spending and expand net margins.
  
• The Performance+ initiative is designed to enhance lower-funnel advertising products, potentially improving conversion rates and advertising efficiency, thus supporting elevated earnings growth through increased monetization effectiveness.
  
• With significant investments in AI and machine learning for user experience and ad performance, Pinterest anticipates increased ad impressions and relevance, contributing to stronger revenue and margins expansion.
  
• Pinterest's international expansion and third-party demand partnerships are expected to diversify revenue streams and accelerate growth in Rest of World markets, enhancing overall revenue and potentially decreasing reliance on its core North American market.

Pinterest Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Pinterest compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Pinterest's revenue will grow by 22.0% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 51.1% today to 19.2% in 3 years time.
• The bullish analysts expect earnings to reach $1.3 billion (and earnings per share of $1.82) 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 bullish analyst cohort, the company would need to trade at a PE ratio of 31.9x on those 2028 earnings, up from 9.5x today. This future PE is greater than the current PE for the US Interactive Media and Services industry at 16.7x.
• 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 future performance relies heavily on continued successful implementation and scaling of its AI-driven advertising tools and platforms. Any challenges in executing these complex technological initiatives could impact revenue and earnings.
  
• The company faces uncertainty about the full recovery and potential headwinds in the food and beverage sector within CPG, which remains a source of softness, affecting revenue growth.
  
• A key risk is Pinterest's dependency on emerging verticals, like technology and financial services, to drive growth, as these categories currently hold a small market share for Pinterest, impacting the stability of future revenues.
  
• Pinterest's ambitious multi-year product and adoption cycles for initiatives like Performance+ rely on sustained advertiser uptake and favorable market conditions, presenting execution risks that could impact future revenue streams.
  
• International expansion, while offering significant revenue potential, includes risks of regulatory challenges and market-specific issues that could affect margins and profitability targets.

Valuation

• The assumed bullish price target for Pinterest is $49.51, which represents one standard deviation above the consensus price target of $42.42. 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 bullish 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 bullish analysts, you'd need to believe that by 2028, revenues will be $6.6 billion, earnings will come to $1.3 billion, and it would be trading on a PE ratio of 31.9x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of $25.99, the bullish analyst price target of $49.51 is 47.5% 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.