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Motley Fool Issues Rare “All In” Buy Alert
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Elon Musk’s planned takeover of Twitter (TWTR -0.18%) for $44 billion recently stunned investors. It’s unclear whether Musk can actually close that audacious deal, but some investors have already started speculating about other social media buyouts.
At first glance, Pinterest (PINS -3.21%) seems to be an ideal takeover target. Its stock has plunged nearly 80% since hitting its all-time high last February, it’s hovering just above its initial public offering (IPO) price of $19 from three years ago, and it trades at just 17 times this year’s adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).
Image source: Pinterest.
Pinterest still served 433 million monthly active users (MAUs) in its latest quarter, and it previously fielded takeover interest from Microsoft (MSFT -4.18%) and PayPal (PYPL -4.52%). However, investors who expect Pinterest to attract a big buyout like Twitter will likely be disappointed for four reasons.
Twitter is often considered a news platform instead of a social network because it can quickly track trending events as they occur. This makes it an invaluable well of information for traditional news outlets.
Pinterest isn’t a news platform. Its virtual pinboards let its users share ideas for hobbies, do-it-yourself (DIY) projects, recipes, and online shopping with other users. Retailers can also upload their entire catalogs to Pinterest as shoppable pins. That niche made Pinterest a popular platform during the pandemic, and it was well insulated from the fake news and hate speech controversies that plagued Twitter and Meta‘s Facebook.
However, Twitter attracted Musk’s interest because it was a media platform, so his takeover bid is more similar to other billionaire buyouts of news platforms like Jeff Bezos’ takeover of The Washington Post or Marc Benioff’s purchase of Time magazine. Therefore, as a platform for sharing personal interests instead of hot takes on trending news, Pinterest’s niche probably won’t attract big billionaire bidders.
Microsoft reportedly tried to buy Pinterest for about $51 billion in late 2020, and PayPal considered buying the company for $45 billion last October. But today, Pinterest has an enterprise value of just over $10 billion.
The fact that neither tech giant approached Pinterest again following its massive decline suggests it has lost its luster as a takeover target.
In the first quarter of 2021, Pinterest hit a peak audience of 478 million MAUs as more people stayed at home during the pandemic. But its MAUs dropped to 433 million by the first quarter of 2022 as those tailwinds faded. It expects year-over-year growth to stabilize in the third quarter as it fully laps its post-lockdown deceleration, but its high-growth days seem to be over.
That slowdown likely discouraged Microsoft and PayPal from approaching Pinterest again, and it could dampen interest from other potential bidders. Nevertheless, Pinterest’s prospects might still brighten by the end of the year if it stops losing MAUs and successfully rolls out new features.
Rising interest rates could also discourage companies from making big debt-fueled purchases. Tech giants swimming in cash might still step up, but a lot of those companies — including Alphabet and Microsoft — have been plowing their free cash flow (FCF) into multi-billion-dollar buybacks instead.
For big tech companies, spending billions on buybacks would make more sense than buying Pinterest for two reasons: Many of their stocks have become undervalued in this tough market, and buybacks instantly boost their earnings per share without the burden of integrating a new business.
Lastly, any company that buys Pinterest will absorb its declining margins. Analysts expect Pinterest’s adjusted EBITDA margin to decline from 32% in 2021 to 23% as it ramps up its spending on short videos, story-like Idea Pins, and e-commerce features. Most of these features will be more difficult to monetize than its standard Promoted Pins.
A potential buyer might ignore Pinterest’s near-term margin compression if its top-line growth were still accelerating. However, analysts expect its revenue to rise just 21% this year compared to its 52% growth in 2021.
Pinterest isn’t doomed yet, but it needs to prove that it isn’t just a pandemic-era fad. Its downside potential could be limited at these valuations, but investors shouldn’t expect it to attract a big takeover bid anytime soon.
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