While Pinterest (NYSE:PINS) may be down 21% from its highs, its growth story is far from over. A ramping user base in highly monetizable demographics — including women and Gen Z — puts the company in the catbird seat to capture a growing share of e-commerce advertising. The combination of several growth levers and a multi year earnings growth cycle make this a perfect time to buy PINS stock.

the pinterest (PINS) logo on a mobile phone held by a woman

Source: Nopparat Khokthong / Shutterstock.com

PINS Stock: More Than a Numbers Game

PINS’ business model isn’t complicated. Users flock to the site to build and curate collections, called boards, of visual media — mainly images and videos. These boards, which are organized by topic or theme, help Pinners, as the site’s users are called, plan interior design projects, visualize their personal style and dream about upcoming travel destinations. But PINS does much more than inspire its users.

The company is becoming a prime destination for buying new products and services.

Like most social networking businesses, the performance of PINS stock has been closely tied to the growth rate of its user population. But these numbers only tell part of the story. After all, PINS isn’t anywhere close to being the biggest social media platform. While the site claims 459 million active users, roughly half of all U.S. internet users, it’s still only the 14th largest social network globally.

Bigger Piece of a Growing Wallet

Pinterest’s biggest strength isn’t the size of its audience (although that’s still growing at an impressive 37%). It’s the composition of its audience. The company is growing faster than its peers in two important consumer spending demographics: women and millenials. Two-thirds of Pinners are female and 8 out of 10 moms. With women expected to control roughly 75% of discretionary spending by 2028, it’s clear that Pinterest holds incredible value for advertisers.

Millennials are another important category of Pinners driving consumer spending. PINS reaches half of U.S. millennials ages 18-34. Usage among millennials is up 36% since last year, with especially strong growth among Gen Z users. For advertisers, Gen Z offers insight into the up-and-coming design preferences driving future purchases. The Pinterest community has inspired new aesthetics like “cottagecore fashion” and “indie room[s],” whose pins are up 80x and 90x, respectively, since last year.

Gen Z is also seeking Pins about social issues and inspiring movements. Searches for “gender equality … mental health check in” and “body positive” are up as much as 9-fold, opening up new doors for advertisers.

From Inspiration to Action

There’s another reason to like PINS stock: the company’s business model has ample runway for monetizing these younger users.

For advertisers, PINS is the perfect vehicle for understanding these growing spending categories well ahead of their purchasing decisions. Pinners often come to the site to plan early, sometimes months ahead of time. And unlike other services, where ads are sometimes seen as a distraction, ads on Pinterest can actually enhance the user experience.

At the moment, Pinterest’s trailing annual average revenue per user (ARPU) is well below other social media ad sites. On a trailing basis, PINS’s ARPU is only $3.20, far below SNAP (NYSE:SNAP) at $9, Twitter (NYSE:TWTR) at $18 and Facebook (NASDAQ:FB) at $30. But it’s growing. Last quarter, ARPU was $1.57, up 29% year-over-year.

Pinterest management has only begun to realize the firm’s potential in advertising, which should grow ARPU and close this gap. Last June, the company launched a “Shop” tab directly on its Lens feature. Now when users snap or upload a photo, they’ll go directly to a feed of shoppable Pins. These Pins lead directly to the checkout page on retailers’ websites.

The result? A six-times increase in the company’s shoppable inventory. By investing in tools to make shopping easier and more automated, the site generates even more value to advertisers.

Better Positioned to Address New Privacy Features

Closing this ARPU gap will happen faster than investors think. New online privacy features on mobile devices are about to shake up e-commerce advertising, attracting more advertisers to PINS’ platform.

In January, Apple (NASDAQ:AAPL) announced a new feature called App Tracking Transparency (ATT). It aims to implement this feature across its mobile operating system over the next few months. ATT is a universal prompt, which gives mobile users the choice of whether an app can use data about their behavior to deliver targeted ads.

The result? App developers won’t be able to collect information about users’ browsing habits without their consent.

With at least 40% of users expected to say no to tracking, Apple’s privacy efforts will make big waves. Social networks will have less visibility into important user metrics that make ad impressions valuable. As a result, Pinterest, like its social peers, will need to build its own audience measurement tools to collect these behavioral insights. While building this intelligence will take time, PINS has a leg up over the competition because it already has a lot of the information its advertisers want.

Unlike most social networks, which focus on brand awareness advertising, PINS’ focus is on performance-oriented advertising. Advertisers come to PINS not to promote their brands, but to understand and influence decision-making and shopping behaviors. And because PINS users already exhibit a high degree of purchasing intent and planning behavior, the company has a wealth of information it can tap to to add value for its advertisers.

Long Runway Ahead Makes This Social Play a Buy

PINS is in the early stages of building an advertising product suite that fully taps its attractive customer demographics. The combination of a growing user base and new ways of increasing ARPU should easily drive a minimum of 40% annual revenue growth over the next few years. This trend will also expand gross margin (from 73% last year to over 80%) and improve adjusted EBITDA margins (from 21% to over 30%). A $1.8 billion cash balance and negligible long-term debt affords PINS ample liquidity to continue to fund its growth.

While the stock trades at 55x earnings, a premium to growth, the valuation looks reasonable for a multi-year 40%+ earnings growth story. With upside ahead, now is the time to buy PINS stock.

On the date of publication, Joanna Makris did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Joanna Makris is a Market Analyst at InvestorPlace.com. A strategic thinker and fundamental public equity investor, Joanna leverages over 20 years of experience on Wall Street covering various segments of the Technology, Media, and Telecom sectors at several global investment banks, including Mizuho Securities and Canaccord Genuity.

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