The last year has been a rough ride for Pinterest investors. When the company started trading publicly in 2019, shares stayed rangebound between $25 to $30.
Like nearly all companies, it took a dip early 2020, reaching its lowest price of $12.21 on March 20. Then, the stock began an impressive climb that positioned Pinterest as a darling social media company. Share prices peaked on February 19, 2021 at $85.90. From that day, though, it become a considerably more uncertain bet as share prices fluctuated wildly.
By the end of Q1, 2022, Pinterest traded for just $24.81, almost exactly the levels buyers paid when the company went public on April 18, 2019.
This raises two critical questions:
- What happened to ruin shareholders’ optimism in Pinterest?
- Does Pinterest have a path forward that could lead to recovery?
Why Pinterest Stock Surged in 2020
Like many other social media companies, Pinterest reaped the benefits of audience’s increased attention over the past few years.
The picture-based platform might have succeeded more than many competitors because it fosters inspirational themes, such as learning how to cook well. While some social media sites felt depressing, Pinterest could lift spirits.
During the fourth quarter of 2019, Pinterest had about 335 million worldwide active users. That number grew as the pandemic worsened. Each quarter brought more users to the platform. Users peaked during the first quarter of 2021 at 471 million users.
Why Pinterest Lost Momentum in 2021
Unfortunately, the number of monthly active users started to slip after the first quarter. It dropped to 454 million during Q2 2021 and continued its fall to 444 million in Q3. The fourth quarter of 2021 shows that Pinterest had 431 million active monthly users around the world.
Since Pinterest started losing active users, it makes sense that its stock price would slip slightly. Some investors, however, read a lot into the reported numbers. They worried that Pinterest had peaked and didn’t have any room for growth. As a result, they started selling their shares and prices fell even faster than user numbers.
It certainly didn’t help when Morgan Stanley publicly complained that Pinterest had “too much uncertainty.” Morgan Stanley expressed disappointment in the company’s revenues. Although Pinterest was generating higher revenues, the amounts did not meet Morgan Stanley’s projections.
From Morgan Stanley’s perspective, Pinterest became a stock to sell because it was losing active users, and users who remained on the platform were spending less time there.
Pinterest Has Potential Opportunities for Recovery
Morgan Stanley paints a bleak picture for Pinterest. It seems ridiculous to suggest that Pinterest has the same value today as in 2019. After all, the company makes much more money and has doubled its number of users since 2019. Despite that, today’s stock price is almost exactly what investors paid in 2019.
The pessimistic outlook disregards some important points. For instance, 2021 Q4 revenue grew 20% year over year to $847 million. Financially, Pinterest has done very well even as it lost users. How can a company’s stock price fall so much even as sales are rising?
Some investors have written off the company as a dinosaur that has already outlived its usefulness. Competition from TikTok in particular poses a serious threat to Pinterest.
The platform will need to find new ways to attract users, add revenue-generating ads to content, and crucially improve technologically to catch up with Tik Tok’s famously successful algorithm.
Pinterest Could Benefit Long-Term Investors
We ran the numbers on Pinterest and they look good from a fundamental perspective. If you’re willing to buy the fear, the upside seems compelling.
A discounted cash flow forecast analysis reveals upside potential to $33.08 per share, representing 42% upside from current levels.
What To Look for Going Forward With Pinterest
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