Pinterest (NYSE:PINS) stock has seen some big selling in the last six months. During this period, PINS stock has corrected by more than 50%. The major reason for this is stock revaluation as growth decelerates. The broader market correction has also accelerated the decline, and investors are seeking refuge in low-beta stocks.
However, it seems to me the selling is overdone. With the stock trading at a forward price-to-earnings ratio of 22x, the downside from current levels is capped.
It’s also important to mention the growth story for Pinterest might be far from over. There are potential catalysts that can spark a renewed rally in PINS stock.
Much has been talked about in terms of concerns as the stock declined. Let’s focus on the positives, which make the stock worth considering around $20 levels.
International Markets Growth in PINS Stock
When Pinterest reported fourth-quarter 2021 results, the company’s revenue growth in the U.S. was sluggish at 11% on a year-over-year (YOY) basis. However, the United States accounted for almost 77% of the total revenue. Considering this data, it’s not surprising the stock has been in correction mode. Top-line growth in the biggest market has been decelerating.
The good news is Pinterest reported 61% YOY revenue growth from international markets. For this news to trigger a positive reaction, the percentage of revenue from international markets need to increase on a consistent basis. I believe that’s entirely likely considering the global addressable market for Pinterest.
Another important point to note is that the company’s average revenue per user (ARPU) in the U.S. was $7.43 in Q4 2021. For the same period, international ARPU was $0.57.
Clearly, international ARPU has a lot of catching up to do. I am not expecting the international ARPU to be anywhere near that of the U.S. However, even if it doubles from current levels, the impact on EBITDA and cash flows will be meaningful.
As a matter of fact, international ARPU for Q4 2021 increased by 62%. If this growth sustains, Pinterest is positioned for margin expansion and cash flow upside even if user growth is relatively slow. I therefore see international markets as a critical component of the next phase of the rally for PINS stock.
Making Pinterest More Shoppable
One area that looks interesting is the gradual transformation of Pinterest into a shopping platform. In 2021, Pinterest expanded shopping to 13 international markets. Features include merchants uploading their catalog on the platform.
From a growth perspective, there are two important points to note.
First and foremost, the company will expand shopping into more international markets. Building the shopping platform is likely to help in boosting ARPU growth.
Furthermore, as the shopping platform gains traction, it’s very likely advertisement revenue from Pinterest will trend higher. As a matter of fact, the growth in global ARPU for Q4 2021 was primarily driven by advertising demand.
Pinterest’s Strong Financial Profile
From a financial perspective, Pinterest looks attractive. The company reported an adjusted EBITDA margin of 1% in 2019. The margin improved to 18% in 2020. Further, adjusted EBITDA margin was 32% in the last financial year.
Also, for 2021, Pinterest reported operating cash flow (OCF) of $753 million. If the OCF continues to swell, Pinterest will be well positioned to make investment for further platform development.
As of December 2021, the company also reported $1.4 billion in cash and $1.1 billion in marketable securities. With a total cash buffer of $2.5 billion, Pinterest has strong financial flexibility.
With the company focused on making the platform more shoppable, I would not be surprised if Pinterest pursues acquisitions. This is a speculative view considering the long-term focus and the financial headroom. The inorganic route can also help Pinterest accelerate growth.
Concluding Views on PINS Stock
In 2020, Pinterest invested $219 million in research and development. The company’s R&D expenditure increased to $310 million in 2021. It has been investing in “deeper and more frequent” engagement on the platform.
Be it expansion in international markets or growth in ARPU, the outlook is positive for Pinterest. The company has been investing on a sustained basis to make the platform attractive. This is likely to boil-down to user growth and further increase in ARPU.
Overall, PINS stock looks attractive after the big correction. I would not be surprised if the stock doubles from current levels of $24 in the next 18-24 months.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.