Down 23% YTD, Here's Why I'd Buy the Dip in Pinterest Stock

Pinterest (PINS) stock has experienced a significant decline of about 23.5% year-to-date, starkly contrasting with the S&P 500 Index's ($SPX)9.4% gain. This drop reflects macroeconomic uncertainties that have impacted advertising dollars and heightened competition in the market. Additionally, Pinterest’s third quarter (Q3) 2024 revenue guidance fell below expectations, further weighing on the stock's performance.

In Q2 2024, Pinterest reported $854 million in revenue and adjusted earnings of $0.29 per share. While revenue grew compared to the previous year, the growth rate slowed from 23% in Q1 to 21% in Q2. The company anticipates Q3 revenues between $885 million and $900 million, missing analysts’ expectations of $909 million. Further, this forecast suggests a year-over-year growth rate of 16% to 18%, indicating a continued deceleration in revenue growth.

While the immediate negative reaction from the market was expected, it’s essential to look beyond the headline numbers, especially as Pinterest’s initiatives and strategic investments suggest that the company is poised to deliver solid growth.

With this background, let’s explore why Pinterest stock is a buy right now.

• AI Integration to Drive Advertising Revenue: Pinterest is leveraging artificial intelligence (AI) to enhance the user experience and drive advertising revenue. Its investments in AI have helped the company improve the relevance and personalization of content recommendations. Further, Pinterest has notably increased its global search fulfillment rate, assisting users in finding relevant content more efficiently. The company is expanding its generative AI-based guided search, which was initially rolled out for the Home Decor vertical. This feature is proving particularly useful for users unfamiliar with the platform. Notably, Pinterest's investment in AI and automation is yielding positive results, driving engagement on its platform and helping the company gain share with some of the largest advertisers in the world. The Performance+ suite, which it recently introduced, simplifies campaign setup and enhances advertisers’ control, leading to better results. The rollout of Performance+ is anticipated to drive its product uptake and adoption curve, which will lead its advertising revenue in the coming years.
• Focus on Enhancing User Experience: Pinterest has significantly enhanced the user experience with updates to boards and new content formats like collages. By refining its user interface and offering collages to advertisers, the company enables the creation of visually appealing ads using product pins from their catalogs. These innovations are boosting engagement and laying a solid foundation for revenue growth. In Q2, Pinterest's global monthly active users (MAUs) hit a record high of 522 million, marking a 12% year-over-year increase. This growth is attributed to the company's efforts to drive engagement on its platform. Further, the company’s average revenue per user (ARPU) increased sequentially and year-over-year in Q2.
• Driving Shopping Capabilities on its Platform: Pinterest is enhancing the shopping capabilities on its platform. It launched new filters like price, retailer, and brand for targeted search queries in fashion and home decor verticals. These filters give users more control over their shopping experience, enabling them to find products that match their preferences and budget. The company is also making video content more shoppable. For example, the Shop to Look on Video feature allows users to shop for items seen in videos directly. Pinterest's introduction of video shopping ads has been well-received, and a growing number of advertisers are incorporating video into their product catalogs.
• Improving Monetization: Pinterest focuses on improving its monetization rate by making the platform more valuable and effective for advertisers. While its revenue growth rate moderated, its top line could continue to grow, and the growth rate will likely accelerate in the coming years due to significant improvements in monetization rate and ad offerings. The company’s management said during the Q2 conference call that the value offerings and effectiveness of ads are driving advertisers to its platform and leading them to allocate more advertising budget to Pinterest. Pinterest’s new automation suite, Performance+, is expected to enhance campaign efficiency, driving further value for advertisers and generating more revenue for the company.

The Bottom Line on Pinterest Stock

While Pinterest's stock has faced challenges and short-term setbacks, the company’s strategic initiatives, investments in AI, and focus on improving user experience and monetization rate position it for a strong rebound.

The company’s ability to drive user engagement, enhance advertiser value, expand its revenue base, and grow margins suggests that the current dip in Pinterest stock presents a buying opportunity for long-term investors.  

While most analysts share this optimism and recommend a “buy” on Pinterest stock, some experts remain cautious due to the macro uncertainty and weakness within the CPG sector, specifically food and beverage advertisers.

Among 29 analysts covering Pinterest stock, 18 recommend a “strong buy,” two suggest a “moderate buy,” and nine have a “hold,” reflecting a consensus rating of “moderate buy.”

The average price target for Pinterest stock is $43, indicating a potential upside of about 52.4% from current levels.