All of a sudden, it seems like everything's going right for Pinterest (PINS 0.02%) stock. As company CEO Bill Ready reported last week, Pinterest's investments in artificial intelligence (AI) and efforts to improve "shoppability" on its website (by introducing direct links between ads and advertiser websites), helped drive 23% sales growth in Q1 2024.
Granted, profits remain elusive for the social media company. But most analysts agree that 2024 will be the year Pinterest gets back in the black, and one analyst in particular -- Piper Sandler's Thomas Champion -- says within a year, Pinterest stock will fetch $50 a share.
Is Pinterest stock a buy?
In a note strewn with industry lingo abbreviations -- "lower-funnel 1P DR product adoption," "3P partnership contribution" -- Champion ultimately concludes that investors should buy Pinterest stock, calling it his "top SMID idea."
"SMID" might puzzle investors as well, because Champion's referring to small and mid-cap stocks. Pinterest, however, is valued at nearly $28 billion, whereas small caps generally top out at $2 billion, and mid-caps at $10 billion. Quibbles over definitions notwithstanding, Champion's actually right on the big question: whether Pinterest is a good growth tech stock to buy.
Investments in AI and ease of use are driving more traffic to Pinterest's partners, yielding more ad revenue for the company in return. Sales are up double digits, and continuing to grow at similar speeds, while profit margins on those sales are almost back up to pandemic-era highs -- more than 78%.
On top of all this, Pinterest's valuation looks simply terrific. Analysts forecast Pinterest stock will grow its profits at an average annual rate of 37% over the next five years. With Pinterest costing only 32 times current-year free cash flow (i.e., cash profits), this yields a price-to-free cash flow-to growth ratio of less than 1 -- a low number that tells me Pinterest stock is cheap enough to buy.
