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Pinterest Stock Valuation Shows the Dark Side of Being a Growth Stock

InvestorPlace - Stock Market News, Stock Advice & Trading Tips Pinterest lost U.S. users in the second quarter, and that's where its profits come...

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This story originally appeared on InvestorPlace

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

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Investors pay up for growth. Witness Pinterest (NYSE:PINS). Revenues grew 48% in 2020. They rose 26% between the first and second quarter 2021. They should easily exceed the 2020 total after Q3 numbers are announced on Oct. 28. If 2021 sales hit $2.246 billion, the current PINS stock price equates to about 15 times sales.

the pinterest (PINS stock) logo on a mobile phone held by a woman
Source: Nopparat Khokthong / Shutterstock.com

That’s expensive for the online shopping site built around a user interface filled with pictures and pins

After those second-quarter numbers came out, with sales up 125% year-over-year, Pinterest stock got crushed. It has remained crushed, now down 17% for the year.

Welcome to the dark side of growth.

What Went Wrong for PINS Stock?

It took some digging to find out what went wrong. It’s serious.

While monthly average users (MAU), the number of people who come by the website at least once each month, rose 9% to 454 million, the number of U.S. users fell by 5%. That’s a problem because average revenue per user (ARPU) for those U.S. users is $5.08. It’s just 36 cents outside the U.S.

Unless Pinterest can boost its international ARPU, it means revenue may not grow fast, even if the user base continues to grow. It may not grow at all. Analysts now expect minimal revenue growth, just 2%, in the third quarter. You don’t pay a premium for that.

Pinterest stock dropped by 30% in less than a month after its earnings came out. Even now the stock is overpriced. It was selling at over 20 times revenue before the fall.

Management says it’s addressing all this. It is extending in-app shopping features to seven more countries, including big ones like Mexico, Italy and Brazil. In-app shopping is a vital feature for the site, but it takes infrastructure to enable it. Pinterest is also testing a new vertical scrolling feed, called “Watch” mode. It’s like Bytedance’s TikTok. (Everything is like TikTok these days.)

Management now says they’re going to focus on “monetization” rather than user growth. They’re going to do better managing their cloud costs.

Changing the Game

The problem for investors is you’re changing the investment proposition. You’re no longer talking about growth but about profit. Right now, investors are expecting profit of just 1 cent per share for the current quarter. Last Christmas, the benchmark which must be a big one for any shopping site, earnings came to 30 cents per share.

Assume that Pinterest can replicate that Christmas performance for a full year. You’re still talking about just $1.20 per share of earnings. That would be a forward price-to-earnings ratio of 45. No, thank you.

There’s also the distraction of a lawsuit. Christine Martinez, a California woman, claims she worked on the site’s design in its early days. She says promises were made but weren’t kept as the founders became billionaires. She says she had a verbal contract.

Usually such a suit might be a nuisance. But Martinez is at the heart of the Pinterest market. She’s a 40-year old woman with talent and trust. It’s not a good look for the platform.

The Bottom Line

There are a lot of stocks like Pinterest in today’s market, that is, companies selling for huge multiples of their sales.

In some niches, like computer security, these valuations are justified. Will I pay 10 times sales for Palo Alto Networks (NYSE:PANW)? Why, yes. It should grow into that valuation. PANW sells enterprises something they desperately need, and they do it by subscription.

Pinterest is a shopping site. It’s a retailer. Retailers with stores sell for less than their sales, not 15x. If Martinez wins her suit she should insist on cash, not stock. Because the stock’s going down from here.

On the date of publication, Dana Blankenhorn held no positions in companies mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Living With Moore’s Law: Past, Present and Future available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.

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