Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
What is it that makes a "social media stock" a social media stock?
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Companies like Snap, Facebook (NASDAQ: FB), and Twitter (NYSE: TWTR) are generally thought of as places where users can go to update their status, connect with friends, and talk about current events. People visit these sites for the posts (whether to make them or to read them), and the advertisements that these sites post on their feeds are seen as a distraction -- essential to the company's business model as a means of providing cash flow, perhaps, but not really the reason that people go to the sites in the first place.
Not so with Pinterest (NYSE: PINS).
A "fundamentally different" social media company
Initiating Pinterest stock at outperform with a $33 price target, investment bank Wedbush makes the case that the company is "fundamentally different than other social media platforms where users typically come to share news and experiences with friends/global community."
Rather than coming to Pinterest primarily to post things for others to read, argues the analyst, "Pinterest users ... often come to the site for discovery and idea generation and are often in various stages of the commercial intent funnel." While not 100% the case, "often," the analyst is saying -- or at least more often than on other social media sites -- "Pinners" come to Pinterest seeking things that they might want to buy.
And on a site like that, advertising isn't necessarily beside the point at all. Indeed, you could say it's actually native to the environment.
The social media site where ads add value
In an argument that echoes those put forward by many of the company's underwriters last month, Wedbush believes "Pinterest is unique to any other media platform in its visual search and discovery toolset and that advertising actually improves the consumer experience."
Because much of the content on the platform includes things to buy, Citigroup, for example, called Pinterest "a monetization engine" last month, and Wedbush agrees that the company seems well-positioned to "capture greater wallet share due to the commerce intent rich nature of the platform." But how is that working out for Pinterest, financially?
Pinterest by the numbers
Actually, pretty well. Granted, when Pinterest reported its first set of financial numbers as a publicly traded company last month, investors were disappointed that it didn't exceed expectations. Still, the numbers it did put up were hardly bad.
Monthly active users increased 22%, average revenue per user grew 26%, and total revenue for the company soared 54% year over year.
However, the company earned no profit on this revenue. Also, the fact that Pinterest forecast full-year revenue of no more than $1.08 billion -- only 43% greater than 2018 -- showed that even Pinterest's sales are already growing more slowly than they once were. Chances are, this guidance also contributed to its 20% decline in stock price last month.
What it means to investors
So how are investors to square this circle? On the one hand, Pinterest appears to have a native advantage over all the other social media platforms, in that its business model is "ad-friendly," so to speak, versus competitors who must limit the volume of ads they place on feeds or risk being seen as user-unfriendly.
This built-in edge is probably a big reason why Pinterest sales, although slowing, still grew faster than those of any of the other social media company last quarter. (Twitter sales grew 18%, Facebook's increased 26%, and even Snap's 39% pace of sales growth trailed Pinterest's by 15 points.) On the other hand, at a valuation of 18.7 times sales, Pinterest shares also sell at a big premium to Snap (15.5 times sales), Facebook (9.2), and Twitter (8.9).
So you could certainly argue that Pinterest's advantages are already reflected in its stock price. Investors also shouldn't discount the possibility that its rivals, recognizing the company's favorable niche, won't try to tweak their own business models, or create their own "fundamentally different" websites and subsidiaries, to steal Pinterest's thunder and compete it out of business. (Facebook has proven especially adept at this, for example, by creating Stories when Snap appeared as a threat.)
For me, the biggest worry about Pinterest, and the primary reason not to be as enthusiastic about it as Wedbush is, is the fact that the company still hasn't figured out a way to parlay its advantages into actual profit. According to analysts surveyed by S&P Global Market Intelligence, Pinterest won't generate any free cash flow at all before 2021, and won't turn a GAAP profit before 2022.
And the more time Pinterest gives its rivals to invest their winnings figuring out ways to compete with it (Facebook and Twitter are both currently profitable), the less likely the company is to ever become profitable on its own.
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Facebook and Twitter. The Motley Fool has a disclosure policy.