Bursting the bubble

High inflation and rising interest rates have been the main culprits behind the decline of Pinterest stock. All three US indexes are in bear market territory as investors brace for a recession. Given the company’s position as a growth stock, its future cash flows are expected to be hampered as consumer spending decreases, hence the monumental drop in its stock price, from $86 to $21 over the last year.

Nonetheless, Pinterest has been equally responsible for the downfall of its own stock. Its failure to hold onto monthly active users (MAUs) and its slow rollout of new features caused investor sentiment to weaken over the past year. As a result, investment bankers and brokers alike have steadily reduced Pinterest’s price target.

Ready for a change

However, fortunes for the company began to change when new CEO Bill Ready entered the fray. With an abundance of e-commerce experience, he’s pioneered Google’s mobile pay system and was CEO at PayPal‘s Braintree and Venmo. His impressive CV positioned him as a strong candidate to lead Pinterest’s growth in the e-commerce space.

In addition to that, activist investor Elliott Management acquired a large position in the company. The fund is known for its ability to pressure companies into improving its margins and growth prospects. As such, investors and analysts took kindly to this news. Subsequently, this saw Pinterest stock lift itself from its all-time low of $17.19 to leap as high as $25.83, over the last three months.

Besides that, Pinterest has also seen an improvement in its business. The tech company has been able to continue growing its revenue, with average revenue per user (ARPU) also seeing healthy growth. The infamous decline of its MAUs also seem to be tapering off as management guided for a rebound in users going into H2. The introduction of its collage-making app, Shuffles, has sparked plenty of hype and could help its MAUs as well.

That being said, Pinterest will have to show an improvement to its bottom line. After a disappointing decrease in non-GAAP earnings in Q2, investors will be hoping for a turnaround. A continued drop in EPS is definitely a cause for concern as it could mean further downside for its stock price.

Solid platform

So, could this be an opportunity to increase my position in Pinterest stock? Well, the company’s balance sheet is flawless as it boasts a debt-to-equity ratio of 0%. For that reason, I’ve got no doubts that Pinterest would be able to ride out a potential recession with its cash and equivalents of $2.66bn.

Most importantly, the firm is still in innovation mode and is expected to continue its aggressive growth under Ready’s leadership, with plenty of features still not fully rolled out (Shuffles, seamless checkout, product tagging, and more).

Moreover, Goldman Sachs recently upgraded its rating for Pinterest from neutral to buy, with a price target of $31. Overall, it has an average ‘buy’ rating and a price target of $26.50. Therefore, I’ll be buying more Pinterest stock while it sits at its current levels.

Pinning the bottom

While Pinterest reported rather lacklustre numbers, I think there were several key figures that served as catalysts for the stock’s rally. I imagine this to primarily be its revenue, monthly active users (MAUs), and average revenue per user (ARPU).

After disappointing revenue numbers from the likes of Alphabet, Meta, and Snap last month, investors were relieved to see Pinterest perform in line with the guidance it set out in the last quarter. Although there were misses on EPS and EBITDA, it was also a relief to see MAUs bottom, as predicted by CFO Todd Morgenfeld in last quarter’s earnings call.

More importantly, mobile MAUs grew by 8%, while desktop users declined by 30%. This is significant because mobile users constitute more than 80% of the revenue generated. Therefore, Pinterest is seeing growth in higher quality users. And with the launch of its new app, Shuffles, for collage-making and mood boards, I’m expecting growth in mobile users to continue.

Elliott says Pinterest is ready

Another key catalyst for the pop in Pinterest stock can be attributed to Elliott Management disclosing its stake in the company. The activist investor now holds a 12% stake and is the company’s largest investor. Elliott also gave the vote of confidence to Pinterest’s new CEO Bill Ready, which shored up investor sentiment.

The impact of the appointment is already taking effect. Under Ready, ARPU saw an increase of 17% despite a challenging macroeconomic environment. This is most likely due to Pinterest expanding its ad reach to more regions. In Q2, the firm launched ads in Japan, and finally launched Idea Ads in 34 markets. Moreover, it expanded its ad coverage in South America, which should boost rest-of-world ARPU in the future.

Boarding for take off

All that being said, is Pinterest stock worth a position in my portfolio? Well, its monumental drop from an all-time high of $89.90 and high price-to-earnings (P/E) ratio of 60 isn’t very pleasing. Furthermore, inflation and supply chain disruptions are already impacting several of its advertisers, specifically in the consumer packaged goods market.

However, there’s so much more potential behind Pinterest. Its evolution to becoming a hybrid e-commerce and social media platform is starting to take shape. This is evident with the growth in its product catalogue, which now hosts over a billion items. In addition to that, shopping ad revenue grew twice as fast as overall revenue in Q2. And with 90% of search queries still unadvertised, there could be plenty of unexplored revenue waiting in the pipeline.

It’s also worth noting that its balance sheet is as perfect as it comes. With $3.25bn worth of cash and equivalents, and zero debt, I believe Pinterest has got a long runway to expand its business and earnings potential.

The board also mentioned its intention to continue investing this year, and expects to return to meaningful margin expansion in 2023, as Pinterest reaps the rewards of those investments. Having taken everything into consideration, I’ll definitely be buying more Pinterest stock for my portfolio.

Pinterest is Ready

Those following Pinterest for a while now would know that the company is integrating its social media and e-commerce offerings together, as it sees huge potential in that space. This is what led to its partnership with Shopify in 2020.

Since then, it has been churning out new features every quarter. One is AR Try On, which allows users to virtually place items from US retailers, using their phone’s camera. Additionally, it launched Idea Ads, which stimulates paid partnerships between creators and businesses from creator-produced content.

But more recently, it recently acquired THE YES to further develop Your Shop. The acquisition aligns with much of what Pinterest is trying to do, as Your Shop allows users to see customised shopping surfaces with brands and products, based on their activity and preferences on the platform.

Skills to pay the Bill

With those developments in mind, I can see why the board decided to hire Bill Ready. For all that Ben Silbermann has done for the company, his lack of expertise in the e-commerce space was prevalent. Therefore, hiring an online commerce expert is an excellent choice, as the new Pinterest CEO has worked at a number of large companies.

Ready was poached from Alphabet‘s Google, where he was the President of Commerce, Payments & Next Billion Users. He oversaw Google’s vision, strategy, and successful delivery of its commerce products, such as Google Wallet. Furthermore, he’s held several leadership roles at PayPal, where he was the Executive Vice President and COO, while also being the CEO of its subsidiaries, Braintree and Venmo.

With such an impressive record in online commerce, I have full confidence that Ready is the right man for the job. I believe that he’s going to be the right leader to make radical progress in the e-commerce space. As the platform continues to rollout its popular seamless checkout feature, Ready could very well help to scale it internationally, where Pinterest has a lot of untapped potential.

Sale of the year?

So, with the Pinterest stock down 45% this year, could this be the sale of the year? For one, the NYSE firm has one of the best balance sheets I’ve encountered. It has zero debt and a fat cash balance of $2.7bn. Moreover, it boasts healthy earnings margins of 12.5%. These indicators point towards a strong company with good financials, earnings power, and bright future prospects — everything that satisfies Warren Buffett‘s investment criteria. This is why I’m a big fan of the stock.

Despite losing almost half of its value already this year, I still expect the stock to continue declining. This is because growing interest rates are spurring fears of a potential recession. Nonetheless, I’m still bullish about the company’s prospects. As such, I’ll definitely be using the current bear market as a buying opportunity for me to purchase Pinterest shares at a discount.

Money doesn’t always talk

Pinterest stock and its earnings seem to have an inverse correlation. While earnings and average revenue per user (ARPU) continue to grow on a year on year basis, its stock continues to plummet to new one-year-lows.

Despite the increase in ad spend, the majority of analysts seem to misunderstand the tech firm’s business model. The focus seems to be pinned on monthly active users because Pinterest is seen as a social media platform. When viewed as such, a declining number of monthly active users (MAU) doesn’t bode well for the stock. Nonetheless, management stated in its Q1 results that this decline seems to be bottoming out, and expects MAUs to grow again later this year.

That being said, Pinterest is more than just a social media company that generates revenue from users scrolling through its platform. It’s an e-commerce platform with a social media front. The business generates revenue from engagement. This means that advertisers only pay when users engage with promoted pins. As most of these have indirect promotions of products in a pin, Pinterest is essentially selling products through a creative manner.

‘Pinning’ users down

Given that the NYSE-listed firm struggles with pinning users down, a number of acquisitions and partnerships have recently been made. This is an effort to bring better proposition to both advertisers and users.

For one, the company recently acquired Vochi, a video creation and editing app. Additionally, it partnered with Tastemade on a multi-million dollar deal. I can see how these developments will allow creators to create better video content and consequently, bring more users and revenue to Pinterest.

The firm also recently acquired The Yes, an AI-powered shopping platform. It uses an algorithm to find the right products that are personalised for a user’s taste and style. This acquisition aligns with much of what Pinterest is trying to achieve in the e-commerce space, given its recent introduction of Your Shop. Its key partnership with Shopify has paid dividends as well. I expect its top line to increase as it continues to roll out seamless checkout to more merchants.

Discount season

Nevertheless, Pinterest faces economic headwinds. A slowdown in the US economy, where it gets the majority of its revenue from, is expected. This could hinder growth in the short to medium-term. However, this isn’t a huge concern for me, as I plan to buy and hold Pinterest stock for the long term.

With a flawless balance sheet, a mountain of cash at $2.7bn, and zero debt, I’m confident that Pinterest can weather a potential economic slowdown. Not to mention its 12.5% profit margin shows that it’s got substantive earnings power. Moreover, its recent acquisitions and partnerships lead me to believe that Pinterest is finally doing a better job of marketing itself to potential users. As such, I see a further drop in its share price as a buying opportunity for me for Pinterest stock.

Pinning money

Pinterest posted revenue of $575m, up 18% year on year (Y/Y). Non-GAAP EPS also managed to beat estimates as it came in at $0.10. This was 8 cents higher than Wall Street’s expectations. The firm’s net loss was a 76% decrease to -$5.3m this year, a significant step closer to profitability. This was down to the increase in average revenue per user (ARPU), which saw a 28% jump (Y/Y).

The company also saw its cash and equivalents increase to $1.7bn, and liabilities decrease to $459m. This leaves it with room for investment in order to grow its user base and average revenue per user (ARPU).

Pinterest-ing developments

Speaking of the user base, Pinterest did see a decline in monthly active users (MAU). The New York Stock Exchange-listed business saw its MAUs decline by 9% on an annual basis. However, management suggested that the downtrend in MAUs could be bottoming. Nonetheless, the figure saw a 0.5% increase from the previous quarter. CFO Todd Morganfield also expects MAU headwinds to dissipate from Q3 onwards.

To give this figure more context, Pinterest highlighted in its letter to shareholders that mobile users, which make up the bulk of its traffic and revenue, saw mid-single-digit growth in the most recent quarter. This is great news as Pinterest continues to gain more quality than quantity.

Moreover, CEO Ben Silbermann cited plenty of innovations for the platform. One of them is the development of a new API for stakeholders and advertisers. This should bring additional value, which could result in higher advertising revenue. Additionally, it has begun beta testing ‘Your Shop’. Its partnership with Woocommerce has also seen shopping engagement grow, as seamless checkout continues to roll out to more users, according to management on the earnings call.

The monetisation of video Idea Pins, which saw a 15 times increase in engagement, makes me excited too. This is evident in its R&D spending that was up 13% quarter on quarter, with management mentioning its intention to spend more on innovating its offerings throughout 2022.

Pinned down supply chain

All that being said, Pinterest does face a couple of challenges in the near term. Although guidance for revenue in Q2 is for 11% annual growth, macroeconomic factors cannot be ruled out. Q2 is statistically a weak quarter for Pinterest as users venture outdoors. Nonetheless, the removal of sign-up barriers to use the platform should bring more engagement.

However, I will be paying attention to the upcoming US GDP and retail numbers, as they may have an effect on future revenue. After all, supply chain issues have already caused a decline in advertising spend by consumer packaged goods firms. With the effects of China’s lockdowns on global supply chains still to be felt, Q2 could see weaker numbers. Nevertheless, I remain bullish on the long-term prospects of Pinterest and will be buying more shares for my portfolio.

However, this week, the payment processing giant put the rumours to rest. PayPal announced it’s “not pursuing an acquisition of Pinterest at this time”. And the recent gains/losses in the business’s respective share prices have reversed. However, Pinterest is now trading below pre-acquisition rumour prices, despite no other relevant news being released. So does this recent sell-off present a buying opportunity for my portfolio? Let’s take a closer look.

The dwindling Pinterest share price

As a reminder, Pinterest is a social media platform focused on idea generation and item discovery. This has proven to make it quite unique compared to some of its competitors like Facebook from a user’s perspective. And in my experience, it creates a less intrusive advertising environment for businesses. 

Since the start of 2021, this technology stock has not been a stellar performer. In fact, it’s down by around 30%, pushing its 12-month performance into the red by 5%. This downward trajectory appears to have been triggered back in July after releasing its latest earnings report. The company grew its active monthly user (MAU) base by around 9% to 454 million. However, this was a significant slowdown compared to historical growth rates and came in below analyst expectations of 482 million. 

Given MAUs represent the addressable target size advertisers have access to, a slowdown is obviously bad news. So seeing the Pinterest share price fall as a consequence is hardly surprising to me. But this may not be as big a problem as the market seems to think.

Explosive growth potential on the horizon

Pinterest is still quite a young business that has yet to fully monetise its platform. Currently, monetisation efforts have been almost entirely focused on its US user base. In fact, 78% of revenue generated in the most recent quarter came from American Pinners. But what I find interesting is that Americans only represent around 20% of total MAUs. In other words, the platform has yet to fully monetise its international audience, which is nearly four times larger. To me, that presents an enormous long-term growth opportunity for both Pinterest and its share price.

With that in mind, the recent price drop, while certainly unpleasant for existing shareholders, looks to me like an excellent buying opportunity. There’s no denying Pinterest has a lot of more dominant competition to fend off and marketing budget managers to convince. But so far, from what I’ve seen, the company seems to be faring well. Therefore, I’m considering adding this business to my growth portfolio today.

Share price surges on acquisition rumours

Last week, Bloomberg published an article that revealed payments processing giant PayPal (NASDAQ:PYPL) is in late-stage talks to acquire the social media platform. The deal values Pinterest at around $45bn, which roughly translates into a share price of $70. Given Pinterest shares rose to $63.3 at one point, but actually closed at $55.58 on Tuesday, that represents a premium of around 26%.

Seeing stocks suddenly rise on acquisition rumours isn’t uncommon. But the keyword here is rumour. Neither PayPal nor Pinterest confirmed discussing a potential deal. Nor is there any detailed information as to what such a deal would actually look like.

I think it’s also worth noting that Microsoft has previously tried buying Pinterest at a higher price of $51bn, which the social media platform rejected. Perhaps this is why the Pinterest share price has since fallen again to around $58 from that $63.3 high. With no guarantee of an acquisition, it seems many investors used the surge in price as an opportunity to close their positions. But let’s assume the rumours are true. Why would PayPal want to acquire a social media platform?

Does the deal make sense?

At first, the combination of a payment processing business and social media doesn’t really seem to fit. However, as the world continues to shift its shopping habits to the online space, social media platforms have been launching their own e-commerce environments. For example, Facebook now has an entire marketplace on its platform where users can buy and sell their own stuff. And so far, this has proven to be a highly lucrative venture.

Due to rising pressure from competitors like Shopify, PayPal could be venturing into this new space as means of maintaining its growth. With that in mind, a social e-commerce platform could fit nicely into PayPal’s payment ecosystem. And given that Pinterest was designed for item discovery, it could serve as the perfect landscape for driving online sales through PayPal’s network. At least, that’s what I think.

The bottom line

As a PayPal shareholder, this deal looks like it could be quite complementary. However, would I buy shares in Pinterest today on this news? No, I wouldn’t. In my experience, a potential acquisition is a poor method of selecting which stocks to invest in. And since larger historical acquisition attempts have failed, I think the odds aren’t exactly in Pinterest shareholders’ favour.

For now, I’ll be staying on the sidelines and seeing how this story unfolds.

Chinese e-commerce giant

Alibaba (NYSE: BABA) has faced an extremely difficult few months, due to the regulatory crackdown from the Chinese government. This has included a fine of $2.82bn, equivalent to 12% of the company’s net income in the financial year 2021, due to its e-commerce business being anti-competitive. Since then, the Chinese government has continued its scrutiny of the e-tail giant, handing out several smaller fines over unapproved investments and acquisitions.

This has also extended to its affiliate, Ant Group, which has caused further problems for Alibaba. Indeed, in November last year, China suspended the record $37bn Ant Group IPO. It also called on it to restructure its business. This included folding its micro-loan services, Jiebei and Huabei, into a new finance firm. Recently, it has also declared that it wants to break up Alipay, the platform Alibaba uses to facilitate customers’ online transactions. As Alibaba owns a third of Ant Group, this is clearly all very worrying.

So, why would I still want to buy this growth stock? Well, despite all the regulatory issues, the company is still performing excellently. In fact, in fiscal year 2021, revenue rose 41% to $109.5bn. Despite the extremely large anti-monopoly fine, income was also over $13bn, just a 2% decrease year-on-year. Excluding the impact of this fine, net income increased 30%. As such, Alibaba is performing extremely well from a financial point of view. After its share price has fallen around 40% in the past year, it also has a price-to-earnings ratio of under 20. Accordingly, although regulatory headwinds are likely to cause short-term volatility, I think the recent dip in its share price makes Alibaba very tempting.

A US growth stock I’m avoiding

While a drop in a company’s share price can signal a great time to buy, it can also signal the start of a major decline. In this respect, I’m less convinced about Pinterest (NYSE: PINS), which has fallen over 30% in the past two months. This is because investors were disappointed in its recent trading update.

In many ways, this disappointment may seem unwarranted. In fact, Q2 revenues rose 125% year-on-year to $613m, and it reported net income of $69m. Reaching profitability is an excellent sign in any growth stock.

But the main concern was the fact that monthly active users had fallen 5% in the US. For me, this signals that growth is starting to slow. Further, Pinterest has a price-to-sales ratio of around 16 and a price-to-earnings ratio of over 100. This signals that investors expect very large growth. Due to monthly active users starting to fall in the US, I don’t think the company’s current growth prospects can justify this valuation.

Recently, however, there have been signs of a comeback. Since their May lows, stocks such as Twilio, DraftKings, and Roku have all bounced around 20%.

This could be a ‘dead-cat-bounce’, of course. In this inflationary environment, there could be further falls to come for high-growth stocks. Nevertheless, I think it’s worth having a nibble at some of these kinds of stocks right now (with a long-term view). With that in mind, here’s a look at two Cathie Wood-owned, high-growth stocks I’d buy for my own portfolio today.

A top Cathie Wood growth stock

One Cathie Wood growth stock I continue to like from a long-term investment point of view is Shopify (NYSE: SHOP). It’s a Canadian technology company that offers an e-commerce platform. Through this platform, retailers can launch an online store effortlessly.

Shopify has grown at an incredible pace in recent years and the company’s first-quarter 2021 results, posted on 28 April, showed more impressive growth. For the period, total revenue came in at $988.6m, up 110% year-on-year, while gross merchandise volume was $37.3bn, an increase of $19.9bn, or 114%. Operating income for the quarter was $118.9m, or 12% of revenue, versus a loss of $73.2m in Q1 2020.

Looking ahead, I expect Shopify to keep growing at an impressive pace, driven by the growth of the e-commerce industry. This year, Wall Street analysts have pencilled in top-line growth of around 50%.

It’s worth noting that Shopify is an expensive stock. Currently, its price-to-earnings (P/E) ratio is over 300. This adds risk to the investment case.

However, we have seen in recent years that not buying a stock because it has a high P/E ratio can backfire. Amazon has consistently had a high P/E over the last five years and in this time, its share price has risen about 350%. So, I’m willing to have a small nibble at Shopify stock at current levels.

Analysts like this stock

A second Cathie Wood-owned growth stock I’d buy right now is Pinterest (NASDAQ: PINS). It’s a social media company that offers a ‘visual discovery’ engine.

This is another company that is generating very impressive growth. Its first-quarter 2021 results, for example, showed revenue growth of 78% year-on-year. Meanwhile, global monthly active users (MAUs) rose 30% to 478m. Looking ahead, Pinterest said it expects revenue growth of around 105% for the second quarter of 2021.

Pinterest is now ramping up the monetisation of its platform. In the first quarter, it achieved average revenue per user (ARPU) of $1.04 globally. There appears to be plenty of room for growth here, however. Rival Facebook currently has an ARPU of around $10.

Pinterest stock is also quite expensive. Currently, PINS sports a forward-looking P/E ratio of about 70. If growth stalls, the stock could take a hit.

I think the long-term growth story here is attractive, however. It’s worth noting that the average analyst price target is $85 – about 33% above the current share price.

This underperformance from the UK shows why it’s generally a good idea to have some exposure to US stocks. By allocating capital to the US, UK investors may be able to boost their returns (and lower their overall portfolio risk).

Here, I’m going to highlight two US stocks I’d buy for my own portfolio today. Both have had a good run over the last 12 months. However, in the long run, I think they can go much higher.

Warren Buffett’s top stock

One US stock I’d buy today is Apple (NASDAQ: AAPL) – Warren Buffett’s top holding. This is a world-class company, in my view. Not only does it own one of the most powerful brands in the world, but it also has a formidable ‘ecosystem’ that locks customers in.

Looking ahead, I think the future looks pretty exciting for Apple. For starters, we’re about to see a huge 5G ‘upgrade cycle’ where consumers trade up to 5G-compatible handsets.

Secondly, revenue in its services division, which includes Apple Music, iCloud, and the App Store, looks set to keep rising rapidly. With the company charging a 30% commission on many paid apps and in-app purchases, the App Store is set to bring in billions in revenue in the years ahead.

There are risks to consider here, of course. One is the global semiconductor shortage that’s affecting a lot of tech firms. This could impact sales in the short term. Another is competition from rivals such as Samsung.

Overall however, I think the long-term investment case here is very attractive. With the stock down 8% from its 2021 high and currently trading on a forward-looking price-to-earnings (P/E) ratio of 30, I’d buy it today.

A top US growth share

Another US stock I’d buy today is Pinterest (NASDAQ: PINS). It’s a social media company that offers a ‘visual discovery’ engine. It’s often talked about as the ‘friendly’ social media platform due to the fact there’s very little trolling and abuse on the platform compared to other platforms such as Facebook and Twitter.

The reason I like Pinterest is I believe it has a lot of potential in the e-commerce space. Last year, the company formed a partnership with online shopping powerhouse Shopify that allows its retailers to upload their product catalogues to the Pinterest platform. This makes it easy for users to go from searching for inspiration to buying goods online. Looking ahead, I expect to see retailers increase their ad spend here substantially, as the platform is an advertiser’s dream.

I will point out that this is a more speculative stock. Profits are still very small, and the valuation is quite high (the forward-looking P/E is close to 100). If future growth is disappointing, the stock could fall.

However, I’m encouraged by the fact that Microsoft approached Pinterest about a takeover recently. This indicates to me Pinterest is a very good, desirable company with a lot of growth potential.