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Why Pinterest is now a top stock to buy

The stocks of the visual search and media platform company Pinterest (NYSE: A2PGMG) sold out last Wednesday. By the time the market closed, stocks were down about 15%. The sales followed Pinterest's quarterly report for the first quarter and were driven by slower-than-expected user growth over the period.

But the market may have overreacted. But it gets better, the sharp sell-off in the stock looks like a great buying opportunity for investors.

Here's a closer look at Pinterest's first-quarter report - and why the stock might be a good buy today.

Don't overlook Pinterest's increasing revenue

Pinterest's monthly active users grew 30% year over year to 478 million in Q1. Unfortunately, this was a little worse than the approx. 480 million users that the analysts' consensus estimate provided. In addition, management forecast the metric to grow by around 15% year-over-year for the second quarter. The expected slowdown may have scared some investors off.

But investors who focus too much on Pinterest's monthly active user numbers may miss the revenue growth. First quarter revenue increased 78% year over year to $ 485 million. “We saw increased demand from medium and small advertisers, who contributed nearly 50% of total revenue in the first quarter,” said Pinterest management of earnings momentum during that period, “as well as an acceleration in conversion-based revenue, with a significant portion being automated Bidding is ongoing. "

Looking ahead to Q2, management forecast revenue growth of 105% year over year. Pinterest lags behind some simple comparisons this quarter as the pandemic led many marketers to pause or cut back on their ad spend in Q2 2020. However, management's revenue forecast for the second quarter was above the 95% growth rate that analysts had forecast.

A growth stock worth owning for the long term

This could be one of the cases where Warren Buffett's advice "be greedy when others are fearful" might fit well with investors buying stocks today. Pinterests business is firing on all cylinders, yet the stock fell in double digits.

While investors should expect monthly user growth to slow as the economy picks up again and people spend less time on their devices at home, Pinterest is still fully in growth mode. The business model shows signs of scalability. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) soared from a negative $ 53 million in the first quarter of 2020 to a positive $ 84 million (or 17% of sales). While COVID-related cost savings were a partial driver of this improvement, much of it had to do with the scalability associated with Pinterest's revenue growth.

With the sales growth rates that Pinterest can boast, it seems to be early days for the visual search and media platform. Eventually, as the company continues to grow, earnings could be sizeable, which, in hindsight, makes last week's stock price decline look like a great buying opportunity.

Of course, there is no guarantee that Pinterest will continue to grow this fast in the years to come. But if performance over the past few years is any indication of its long-term potential, then the stock's recent double-digit decline is a great buying opportunity.

The article Why Pinterest is Now a Top Stock to Buy was first published on The Motley Fool Germany.

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This article represents the views of the author, which cannot be inconsistent with the "official" endorsement position of any The Motley Fool Premium Consulting Service. Questioning an investment thesis - even your own - helps us all think critically about investing and make decisions that will help us get smarter, happier, and richer.

This article was written in English, and published on Fool.com on April 29, 2021. It has been translated so that our German readers can take part in the discussion.

Daniel Sparks has no position in any of the stocks mentioned.

The Motley Fool owns shares of and recommends Pinterest.

Motley Fool Germany 2021