For investors looking for opportunities, Pinterest (PINS.N) may be a good choice. This site, themed around sharing recipes, fashion pairings, and various creative ideas, has recently performed poorly in stock price. Since the multi-month high in early October, Pinterest's stock price has dropped 15%, currently at $29. Most of the decline occurred after the company announced its third-quarter financial report this month.

Concerns Behind the Financial Report

The issue lies in Pinterest's performance guidance. The company's management expects revenue in the fourth quarter to grow 16% year-over-year, reaching $1.14 billion, which is slightly lower than the third quarter's unexpected growth of 18%. This news disappointed investors; the digital advertising market where Pinterest operates is worth hundreds of billions of dollars annually, and growth should remain stable or even accelerate, rather than slow down. Weak growth has raised investors' concerns about insufficient business capabilities, leading to potentially lower-than-expected profit margin increases.

However, these concerns may be unwarranted. Firstly, Pinterest's management tends to lean towards conservative forecasts and often exceeds expectations. For example, its actual growth rate in the third quarter surpassed the previously guided median of 17%. According to FactSet data, Pinterest has exceeded sales expectations in 18 out of the last 20 quarters. Pinterest may be deliberately lowering expectations in order to surprise the market when it announces its fourth-quarter financial report in February next year.

The slowdown in the food and beverage sector is one of the reasons for the weak guidance, which also means future growth could accelerate. Due to weak demand, food and beverage brands have cut advertising spending, while revenue growth in other sectors exceeded 20% in the third quarter. As demand in the food industry improves, these brands should increase advertising spending again.

Evercore ISI analyst Mark Mahaney pointed out: 'Pinterest is addressing the weakness in the food and beverage advertising sector, and the fundamental trends remain sustainable, thanks to market and product cycles.' He maintains a 'Outperform' rating on Pinterest with a target price of $45.

Innovation Drives Growth

Pinterest's innovative initiatives keep it competitive and drive growth. These include the 'deep linking' feature, which allows marketers to direct users straight to product pages for purchases. Additionally, Pinterest has invested in artificial intelligence technology to show users personalized content and match them with suitable products. These features increase the likelihood that advertisers will convert browsers into buyers, thus supporting advertising prices and attracting more advertisers.

These innovations are also the main reason analysts expect most of Pinterest's revenue growth to come from an increase in average revenue per user (ARPU). FactSet data indicates that the market expects Pinterest's ARPU to grow at an annual rate of 9% by 2026, eventually reaching $8. Although this figure is far lower than Meta Platforms' (META.O) projected $51 revenue per user this year, Pinterest does not need to reach that level to satisfy investors. Combined with several million new monthly active users added each year, this is expected to drive annual sales growth of 15%, reaching $4.8 billion by 2026.

Profit Growth and Valuation Advantage

Even without exceeding sales expectations, Pinterest's profits are expected to grow. The company's spending growth rate is lower than its revenue growth rate. Analysts expect that by 2026, the company's profit margins will continue to improve, with earnings before interest, taxes, depreciation, and amortization (EBITDA) growing at an average annual rate of 26%, ultimately reaching $1.5 billion.

Mahaney stated: 'We continue to see Pinterest at an inflection point in revenue and profit margins.'

Profit growth could enhance the company's market value. Currently, Pinterest's enterprise value is about 14 times its expected EBITDA for the next 12 months, lower than the slower-growing S&P 500 index and below its historical peak of about 17 times. Compared to larger internet peers like Booking Holdings and Airbnb (ABNB.O), which have similar revenue growth rates but higher profit margins, Pinterest is also more attractive in terms of valuation.

If Pinterest can improve its profit margins and achieve similar valuation multiples, this stock is worth investors' 'collection'.

Article forwarded from: Jin Ten Data