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Pinterest leaves peers in the dust with 34% rally

Pinterest Inc. is slowly digging itself out of the hole social media stocks are in.

Pinterest Inc. is slowly digging itself out of the hole social media stocks are in, leaving the owners of Facebook and Snapchat behind thanks to its increased reliance on search-driven advertising.

Shares in the digital bulletin board platform are up 34% from a two-year low in mid-June, as analysts note the growth in the number of users on the site is improving, as is the extent to which they interact with the content there. During the same period, Facebook parent company Meta Platforms Inc. down 22% and Snap Inc. by 12%.

Facebook and Snapchat rely more on targeting users based on their activity on the site, a model that has become less effective following changes Apple Inc. last year on his iPhones for privacy reasons. Google and Pinterest from Alphabet Inc. meanwhile, may show more ads associated with searches users have made on the platforms.

“Pinterest has had a wonderful cash-flow positive business there, and it’s shredding double-digit growth year after year,” said Robert Cantwell, owner of the shares in the actively managed Compound Kings ETF he manages. “It’s an incredibly high-margin disruptive asset, and when it hit a $12 billion valuation earlier this year, it started looking incredibly cheap.”

One advantage of the site over rivals is that users often visit it for the purpose of shopping. For example, someone who is renovating a kitchen and looking for design ideas might get ads for wall tiles or cabinets. Pinterest has worked for the past few years to help advertisers and retailers sell products directly on the site.

That interest in shopping is a unique element of the platform, said Eric Sheridan, an analyst at Goldman Sachs Group Inc., which raised its rating for the stock last week, citing improved user growth and better engagement trends.

Even after rallying from the lows, Pinterest stock is down 37% this year, and it’s still the smallest of the major social media companies, with a market cap of $15.5 billion. The stock was supported by occasional speculation that it would attract a squeeze-out bid.

Shares rose in August after the company reported resilient user numbers and activist investor Elliott Investment Management confirmed a large stake. Elliott said at the time that Pinterest has “significant growth potential” and supports new Chief Executive Officer Bill Ready.

“The market is convinced Pinterest cannot exist as a standalone company and will be acquired at a premium,” said Tejas Dessai, an analyst at Global X, a manager of the Global X Social Media ETF. “The odds of a deal could be much higher” if the company reports weak third-quarter results and a disappointing outlook for the holiday quarter, he said.

While the stock may have looked attractive this year with a market cap of $12 billion, the San Francisco-based company is no longer cheap compared to other social media companies. It is trading at 4.9 times expected revenue, compared to 3.3 times at Snap and 2.7 times at Meta, according to data from Bloomberg.

It hasn’t been an easy year for an industry that relies heavily on online advertising, with a combination of headwinds weighing on shares over the past year: Apple’s software update has made targeted advertising more difficult, competition from new entrants like TikTok is increasing. and now fears of an impending recession are putting pressure on advertising budgets.

The deteriorating environment has led analysts to lower their estimates several times this year. Over the past six months, the average estimate for this year’s adjusted earnings per share is down 42% and the revenue forecast is down 10%, according to data from Bloomberg. Still, the company expects revenue growth of 9% this year and a 17% increase in 2023.

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