With the broader market selling off slightly in September after a sharp run higher in the first eight months of 2021, many stocks are taking a breather. Highlighting the overall market’s pullback, the S&P 500 has declined 1.6% this month and Nasdaq Composite has dipped more than 2%.
Fortunately for investors, bearishness in the market often creates some buying opportunities as stocks sell off. This is especially true when a stock falls more than the broader market. Pinterest (NYSE:PINS), for instance, has fallen a total of 6% in September. And this is on top of an even larger decline for the stock, making shares look particularly attractive. Shares of the visual search and medial platform are now down more than 30% in the past three months.
Here’s why investors may want to look past the market’s pessimism toward Pinterest stock and consider buying shares.
Impressive business momentum
A look at Pinterest’s recent financial results certainly doesn’t corroborate its stock’s price action.
Second-quarter revenue soared 125% year over year to $613 million. Of course, Pinterest was up against an easy year-ago comparison, when COVID-related lockdowns spooked marketers and caused them to significantly reduce or even pause their spending on digital ads. Revenue grew just 4% in the year-ago quarter.
But Pinterest is guiding for strong growth in Q3, when the company is up a much more difficult comparison of 58% revenue growth in the third quarter or 2020. Management said in its second-quarter 2021 update that it expected revenue in the third quarter to increase more than 40% year over year.
The company’s profitability is trending nicely as well, with earnings before interest, taxes, depreciation, and amortization (EBITDA) coming in at $178 million in the third quarter of 2021 (an EBITDA margin of 29%), up from negative $34 million in the year-ago quarter.
Significant earnings growth potential
Of course, investors have to pay up to buy into this growth story. Pinterest currently has a sky-high price-to-earnings ratio of 212. But before investors peg this growth stock as overvalued and walk away, consider some of the reasons it commands this valuation. First, its revenue is growing fast. Second, current profits aren’t representative of its profit potential, as the company is just now swinging from losses to profits. Finally, Pinterest’s business model has significant operating leverage. All of these factors combine to set the company up for soaring earnings. Indeed, analysts, on average, expect Pinterest’s earnings per share to increase about 50% annually over the next five years.
Of course, there are always risks to buying individual stocks. One in particular worth highlighting, in Pinterest’s case, is the company’s recent challenges with growing its monthly active users. While global monthly active users increased 5% year over year in the first 27 days of July (the beginning of Q3), the key user metric fell 7% year over year in the U.S. during the same period. It turns out that the engagement boost Pinterest saw as consumers were spending more time at home represented a significant pull-forward in consumer usage to its platform. If Pinterest can’t return to growth in monthly active users soon, shares may not be worth their current valuation.
However, it’s likely that this user engagement headwind proves to only be temporary, as Pinterest was growing nicely before the pandemic and it remains the leading visual search and media platform. Sure, its user penetration in the U.S. may be nearing maturation; but global monthly active user growth should reaccelerate and help offset domestic challenges. Further, U.S. monthly active user declines could moderate or even flip to growth at some point soon. Finally, Pinterest’s platform has a lot of monetization optionality as the company explores new ad products, e-commerce integrations, and anything else that could streamline discovery, shopping, or the overall experience for its users.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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