This billionaire investor is buying Pinterest stock. Should you?

pinterest (PINS -0.73%) investors received rare good news on Thursday evening when The Wall Street Journal reported that activist investor Elliott Management has accumulated a 9% stake in the social media company.

Shares of Pinterest jumped 16% on Friday news, showing investors are hungry for a positive catalyst after the stock fell about 75% from its peak last year. Led by billionaire Paul Singer, Elliott is known for its aggressive tactics in its technology investments. For example, he pushed for the resignation of Jack Dorsey as CEO of Twitter and successfully urged eBay to spin off its Stubhub and Classified businesses.

Pinterest just named a new CEO with co-founder Ben Silbermann serving as executive chairman. Company taps Bill Ready as CEO, who previously led alphabetical e-commerce and payment activities.

The move shows Pinterest doubling down on its strategy that has already been talked about several times in earnings calls: building an e-commerce business to complement its core advertising model.

Elliott has been in discussions with Pinterest over the past few weeks as it builds up its stake in the business, though it’s unclear exactly what the two parties discussed.

Pinterest, which serves as an image discovery engine allowing users to post or search for images to help with projects such as children’s activities, wedding planning or home improvement, is uniquely owned in social media. With nearly 500 million monthly active users, the company seems to have significant potential.

However, investors soured on the company as its user base shrank last year as the pandemic boom waned and some of its new users returned to real business. At the same time, the company’s once sky-high revenue growth has returned to earth, with revenue rising 18% to $575 million in the first quarter. The second quarter forecast called for only an 11% revenue increase.

With his stake in Pinterest now worth over $1 billion, Elliott clearly sees an opportunity in Pinterest. Should you follow the activist investor in the struggling social media stock?

The good news

While the market may have bailed out the image-sharing site, there are a number of reasons to like Pinterest stock right now, especially at the current price.

First, the user decline is over, although year-over-year numbers continue to decline. In the first quarter, the company recorded 433 million MAUs, down 9% from the first quarter of 2021, but a slight improvement from the 431 million MAUs it had in the fourth quarter of 2021. This is a a sign that the hangover from the pandemic boom is fading and that the company’s user base should return to steady growth.

Unlike a number of growth stocks in the technology sector, Pinterest is also profitable. It ended 2021 with $814.3 million in adjusted EBITDA (earnings before interest, taxes, depreciation and amortization), a margin of 32%. Even on a GAAP (generally accepted accounting principles) basis, the company made a net profit of $318 million, or $0.46 per share. Profit margins are expected to shrink this year as revenue growth slows and the company invests in areas such as native content, Pinner experience and shopping, but there is no reason to s ‘alarm.

As Pinterest and its peers have demonstrated time and time again, digital advertising is a high-margin business at scale.

The risks

The pandemic was something of a white elephant for Pinterest and other tech stocks. Performance skyrocketed during the social distancing period, but now that that surge has subsided, market perception of the company is shattered, and it’s unclear if Pinterest can once again generate strong organic growth or if the company has only been the beneficiary of a pandemic of a lifetime.

While being a one-stop-shop has its perks, it also means that Pinterest’s business model isn’t proven, and there’s evidence that the company struggles to convert new users to frequent users. Unlike sites like Facebook or Snapchat, users don’t come to Pinterest to connect with friends, so the incentive to visit the site regularly is strictly based on a specific need or use case rather than a link. social. Compared to his social media peers, this seems like a weakness.

Should You Buy Pinterest?

Overall, the pros seem to outweigh the cons here. In particular, Pinterest appears to be oversold as the selloff is mostly due to temporary conditions. For example, the decline in the number of users has since ended, consumer behavior is returning to real activities, there is a slowdown in advertising due to Apples changing privacy and fears of a recession are weighing on business investment.

The stock is down due to these temporary conditions, but Pinterest’s core value proposition is still clear. It attracts over 400 million users at least once a month and offers an experience they can’t get anywhere else. The platform is also particularly valuable for advertisers because, unlike other social media sites, users want to see ads. Often they come to the site with a purchase intention, which does not happen with Facebook or Instagram.

This quality is what gives Pinterest so much potential for an investor like Elliott and why it makes so much sense for the company to invest in e-commerce. Selling directly on the site seems like a no-brainer, and if the company can make it work, the stock should be in a much better place five years from now.

At the current price, the downside of owning Pinterest seems limited. And with a market capitalization of just $13 billion and the explosive potential of e-commerce, the upside could easily lead to long-term gains of 5x or even 10x.

Suzanne Frey, an executive at Alphabet, is a board member of The Motley Fool. Jeremy Bowman has positions in Pinterest. The Motley Fool owns and recommends Alphabet (A shares), Alphabet (C shares), Apple, Pinterest and Twitter. The Motley Fool recommends eBay and recommends the following options: $120 long calls in March 2023 on Apple, $57.50 short calls in July 2022 on eBay, and $130 short calls in March 2023 on Apple. The Motley Fool has a disclosure policy.