Google's parent company Alphabet Inc. (NASDAQ: GOOG)(NASDAQ: GOOGL) may be considering an acquisition of image-browsing platform Pinterest (NYSE: PINS). And that's because Pinterest possesses something extremely valuable that Alphabet would definitely like to have in a changing advertising economy.

Don't be fooled by a stock price that's down more than 70% from its all-time high. Here's the case for Pinterest and its potential suitor.

Where did this crazy rumor even come from?

Alphabet CEO Sundar Pichai spoke at the Code Conference earlier this month. He talked about many things going on with the company, including developments in the advertising market and concerns over artificial intelligence. Late in the talk, however, the interviewer turned the conversation toward mergers and acquisitions (M&A).

When asked if Pinterest was an acquisition target, Pichai stammered, "Look, I can't comment on a few, on any M&A deals." He then smiled sheepishly at the interviewer's suggestion that he could comment if he wanted to do so.

Perhaps Pichai was simply uncomfortable with the entire interview and struggled for an answer regarding Pinterest for this reason. However, the interviewer had just asked Pichai the same question regarding Twitter, Inc.(NYSE: TWTR), which he seemingly answered with ease. Alphabet isn't looking to buy Twitter, he said. The drama unfolding with Elon Musk has Pichai simply watching with "popcorn."

Pichai answered the question on acquiring Twitter. He didn't with Pinterest. And that leads some to believe that Alphabet has indeed reached out to Pinterest about a potential acquisition. 

Why Pinterest is a valuable acquisition target

Pichai's comments at the Code Conference is just circumstantial evidence. However, it wouldn't be the first time a big tech company would be interested in buying out Pinterest. PayPal Holdings, Inc.(NASDAQ: PYPL) was reportedly trying to buy Pinterest for $45 billion last year. PayPal's market capitalisation was around $300 billion at the time compared to Pinterest's then market cap of around $35 billion.

Both market caps have fallen mightily -- PayPal is down to about $105 billion whereas Pinterest is worth about $16 billion. And when it comes to Pinterest, its stock has been crushed because of slumping user metrics. It was once believed that Pinterest could potentially attract billions of users like Meta Platforms, Inc.(NASDAQ: META). However, the company peaked at 478 million monthly active users way back in the first quarter of 2021 and has since steadily declined to where it is today at just 433 million monthly active users.

On the surface, Pinterest's relevance is dwindling, which hardly seems like a platform worthy of PayPal and Alphabet's attention. However, Pinterest has steadily increased its monetization, going from $1.04 in average revenue per active user (ARPU) in Q1 2021 to $1.54 in Q2 2022. That's substantial.

Here's what Alphabet and PayPal are likely interested in: Pinterest has steadily increased its monetization thanks to its truly unique perspectives and insights into consumer behaviors. Year after year, the company proves it knows what people want with its annual Pinterest Predicts report -- the report was proven to be 80% correct in 2021.

For Alphabet's part, it generates most of its revenue through advertising. But the game is changing for advertising stocks. Consumers are increasingly concerned about privacy, and governments are regulating more. For this reason, Alphabet intends to do away with third-party cookies in 2024. But that risks making its ads less effective, and that would consequently lead to lower ad rates. 

Acquiring Pinterest and its consumer insights could dramatically help it remain more effective at advertising while also doing away with tracking. 

For PayPal, investors often forget it has a merchant side of its business -- 35 million active merchant accounts as of the second quarter of 2022, up from 32 million in the same quarter of 2021. Part of the company's strategy is to provide data on consumer intent to merchants so they can better know what to prioritize. This is exactly what Pinterest could have provided had the deal gone through.

Pinterest is still a valuable company

In the end, we don't know for sure if Alphabet is really intent on acquiring Pinterest or whether we'll never hear rumblings of this rumor again. However, I believe we have seen that Pinterest's business has value even if it's struggled to create value for shareholders since going public in 2019.

That said, I believe Pinterest is still a stock worth buying today despite its user struggles. Its ARPU growth demonstrates its value to advertisers, likely due to its perspectives on consumer trends. That could make Pinterest an even more attractive platform if the global economy goes into a recession; advertisers would likely decrease spending overall and concentrate spending on platforms where returns are the best. And Pinterest would be a top contender for those concentrated dollars.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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I believe you should buy stocks right now, and I'll support this position with insights from people far more qualified to walk us through this than I am.

With so much uncertainty in the world and in the economy, I know that now can seem like a poor time to invest. But stock pickers could be in a more advantageous position now than they've been for over a decade.

Bull market geniuses or ducks in the rain?

From March 2009 through the end of 2021, the S&P 500 was up over 500%. The march upward only had a couple of brief interruptions, as this chart shows.

^SPX data by YCharts.

If you were buying and holding stocks during this period, it was almost difficult to lose money.

It reminds me of something Berkshire Hathaway Inc.(NYSE: BRKB) CEO Warren Buffett once said. Referencing Berkshire's 34% gain in 1997 in his letter to shareholders, Buffett wrote: "Last year's performance was no great triumph: Any investor can chalk up large returns when stocks soar, as they did in 1997. In a bull market, one must avoid the error of the preening duck that quacks boastfully after a torrential rainstorm, thinking that its paddling skills have caused it to rise in the world." 

To restate Buffett's point, almost all investors look like geniuses in a bull market because stocks are going up everywhere -- just buy something. And this is partly due to the broader economy, since there's a strong correlation between that and the market. When the economy is strong, many businesses do well and their stocks go up.

However, we are entering a whole new world in 2022. The U.S. economy has declined for two consecutive quarters. And things could slow further because of the Federal Reserve, as it raises interest rates to combat inflation. As Fed Chairman Jerome Powell recently said, "Reducing inflation is likely to require a sustained period of below-trend growth."

According to Powell, increasing interest rates will continue to slow the economy. But it's also causing the cost of capital to increase, hurting businesses that need financing. 

The clock is ticking (for some)

The situation I've described is real. Even companies that have historically burned cash, like Snap Inc.(NYSE: SNAP), are pivoting. When it comes to profits, CEO Evan Spiegel recently said, "We must adapt our strategy accordingly." For this reason, the company is making several changes, including trying to better monetize its augmented-reality (AR) technology by launching an enterprise business.

But many unprofitable companies won't be able to adapt. The dot-com bubble more than two decades ago was a similar situation. The market hit its high in early 2000, but the writing was already on the wall. Talking to Forbes at the time, Ron Sege, then the Lycos CEO, said, "There is a certain sense of desperation and anxiety." Specifically, Sege was talking about insiders' desire to cash out and leave their companies in light of market conditions.

Insiders want out when their ability to generate shareholder value goes down. I believe that's the case right now for structurally unprofitable companies in light of changing economic conditions. As Etsy, Inc.(NASDAQ: ETSY) CEO Josh Silverman recently said, "I think we're going to see a reckoning." The torrential rain for Buffett's ducks is over.

However, if you're thinking about waiting to buy stocks until the shakeout is over, that might not be the best idea. The stock market looks ahead, and it sometimes starts recovering from rock bottom before the economy improves. So unless you know exactly when the economy will recover (you don't), you risk missing the stock market bottom.

^SPX data by YCharts.

To summarize up to this point, bull markets produce stock winners everywhere. Bearish market conditions like right now prioritize profits and disproportionately hurt weaker companies. And finally, timing the market bottom isn't easy. Now, here's what to do with this information.

The strong will get stronger

Sequoia Capital's Alfred Lin recently wrote in a presentation, "The slower growing companies that were doing it profitably now have the financial flexibility to take advantage of the pullback from cash burning companies." 

It's like what Motley Fool contributor Brian Stoffel says with his Antifragile Framework for investing: Stocks that are antifragile "get stronger when stress is applied." In other words, the present situation is going to be a long-term benefit for a handful of companies. And if you can identify these opportunities while the market is down, it can lead to some market-crushing results, which is why I believe now is a great time to still be buying stocks.

For instance, investors might take a look at PayPal Holdings, Inc. (NASDAQ: PYPL) stock. With so many unprofitable financial-technology companies out there, PayPal could be in a position of strength. The company has already curtailed spending to boost profits. And at a conference on Sept. 12, CEO Dan Schulman said that earnings per share (EPS) for the current quarter were "coming in a bit stronger than expected." And it's pivoting to greater profitability while still maintaining revenue growth north of 10%. 

Image-browsing app Pinterest (NYSE: PINS) and advertising-technology company PubMatic, Inc. (NASDAQ: PUBM) are two more businesses that can still thrive in the current market. Both companies are debt-free, are in cash-rich positions, and generate positive cash from operations, as this chart shows.

PINS total long-term debt (quarterly). Data by YCharts.

Granted, both Pinterest and PubMatic generate revenue from ads. And the advertising industry will likely struggle in a slowing economy. But that's kind of the point. As Lin said, these two have the financial flexibility to grab market share from cash-burning rivals.

In conclusion, investors will need to be more discerning than ever when picking stocks in 2022 and beyond. There are lots of problems, and many businesses will consequently be permanently impaired.

However, this will create amazing long-term opportunities for a select group of companies that I believe will result in life-changing gains over the years to come. I might not accurately identify all of these stocks. But it's why I want to be picking stocks now more than ever.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Should you really buy stocks now or wait a while longer? appeared first on The Motley Fool Australia.

Pinterest (NYSE: PINS) has seen its stock fall by nearly 80% since hitting its peak in Feb. 2021. The stock surged to elevated levels amid COVID lockdowns and fiscal stimulus. But as users returned to their offline activities and inflation worsened, consumers -- and investors -- turned away from Pinterest. On top of that, investors have most recently had to contend with the resignation of co-founder and CEO Ben Silbermann.

However, monthly active user levels have begun to rise again, and given the much lower valuation for the social media stock, investors may want to take another look at this company.

The state of Pinterest

Pinterest may arguably be the site most geared to individual tastes. Instead of typical user profiles, users "pin" items based on their likes or passions. This information allows the company to generate revenue through "promoted pins" -- ads targeted specifically to users interested in a related product or service. Hence, instead of relying on demographics or psychographics, Pinterest focuses purely on individual tastes.

Also, its users typically have money to spend. About 45% of its U.S. users live in households earning $100,000 or more per year. This level of disposable income should be attractive to advertisers.

Its highest-spending users are in the U.S. and Canada, though it has heavily emphasized attracting non-U.S. users in recent years. Still, in the first quarter of 2022, U.S. and Canadian users contributed an average revenue per user (ARPU) of $4.98. This was well higher than Europe's ARPU of $0.72 or the rest of the world at just $0.08. Thus, challenges in North America will still affect revenue disproportionately.

The new leadership direction

Additionally, another cloud of uncertainty has appeared as co-founder Silbermann steps down as CEO. Silbermann announced his resignation on June 28, and Bill Ready, who headed the commerce, payments, and next billion users segment at Google, will take over as Silbermann becomes executive chairman.

The company wants to embrace e-commerce more directly, and Silbermann feels Ready will be a better CEO for such a transition. Ready has a background in payments, having previously served as the CEO of Braintree and Venmo. He also held various positions at PayPal, including Chief Operating Officer. Though leadership changes tend to bring added risk, his experience in commerce and fintech should enhance Pinterest's retailing and payments-related capabilities.

Why the focus on e-commerce should help

The emphasis on e-commerce should improve ARPU, a bright spot in the company's recent performance. In the first quarter, the company reported 433 million MAUs. While that was up from 431 million in the previous quarter, MAUs were down 9% year over year.

Still, users on the site became more valuable as global ARPU increased 28% year over year to $1.33. Revenue of $575 million was also up 18%, but this extends the company's trend of decelerating top-line growth, falling well short of the 78% growth reported in the prior-year period, and the 20% growth from the fourth quarter. On the bottom line, Pinterest's net loss shrank from $22 million last year to just $5 million last quarter.

But amid the tech sell-off, investors have focused on the slowing revenue growth and MAU stagnation. This has forced the stock down 50% year to date. Nonetheless, the price-to-sales (P/S) ratio has fallen to 4.6, just about its lowest level ever.

Should you consider Pinterest stock?

A low valuation and management's focus on monetizing the platform could motivate investors to buy Pinterest stock. But the MAU results in recent quarters are underwhelming.

Though any major leadership change will bring some uncertainty, Ready has a lot to offer with his experience in e-commerce and payments. Meanwhile, ARPU growth remains robust, and MAU levels do seem to have stabilized. Such conditions could create the foundation needed for Pinterest to inspire a recovery. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Pinterest is down 78% — Is it time to buy? appeared first on The Motley Fool Australia.

Pinterest (NYSE: PINS) and Snap (NYSE: SNAP) both suffered steep declines over the past month.

Pinterest's stock, which had been under pressure since its disappointing second-quarter report in late July, jumped to the low $60s in late October amid rumors of an acquisition by PayPal (NASDAQ: PYPL). However, the stock subsequently tumbled to the mid $40s after PayPal shot down those rumors.

Snap's stock, which had steadily risen after the company offered bullish long-term guidance at its investors day in February, plunged to a five-month low in late October after it posted a disappointing third-quarter report.Over the past three months, shares of Pinterest and Snap have declined about 40% and 30%, respectively, as the S&P 500 has risen 4%. That volatility burned many investors who recently bought both stocks, but will both companies recover and generate much bigger gains over the long term?

Let's take a closer look at Pinterest and Snap's plans for the future and see which social media company might be more valuable by 2025.

How much are Pinterest and Snap worth today?

Pinterest is worth about $29.4 billion, or eleven times this year's sales, as of this writing. Snap is worth $87.6 billion, or 22 times this year's sales.

Here's how rapidly both companies have been growing over the past two years, and what analysts are expecting for the next two years:

Source: Earnings reports. Yahoo Finance. YOY = Year-over-year.

Based on those growth rates, it seems odd that Snap's price-to-sales ratio is twice as high as Pinterest's. However, investors are still willing to pay a premium for Snap because it isn't losing active users on a sequential basis -- as Pinterest did in the second quarter.

Can Pinterest and Snap keep growing?

Pinterest's number of monthly active users (MAUs) rose from 265 million at the end of 2018 to 454 million in the second quarter of 2021. But that marked a sequential decline from 478 million MAUs in the first quarter.

The bulls believe that slowdown, which Pinterest attributed to reopening trends, will be temporary. But the bears believe its growth peaked during the pandemic, and that its MAU growth will stall out as those tailwinds fade.

That uncertainty, along with Pinterest's reluctance to provide multi-year growth targets, has made it difficult to assess the company's future.

Statista Research estimates Pinterest's MAUs in the U.S. will steadily climb from 91 million in the second quarter of 2021 to nearly 109 million by 2025. eMarketer expects 18.5% of Pinterest's MAUs to buy products from its shoppable pins by 2025, up from 16.2% in 2021.

Pinterest's international business has been gaining MAUs at a much faster rate than its domestic business. If Pinterest grows its overseas MAUs at twice the rate of its domestic MAUs over the next four years, it could increase its international MAUs from 363 million in the second quarter of 2021 to 510 million in 2025 -- and give the platform nearly 620 million MAUs.

Snap, which ended the third quarter with 306 million daily active users (DAUs), expects to grow its annual revenue by about 50% over the next few years. It expects the expansion of its self-service ads, a rising mix of higher-value video ads, new augmented reality games and filters, and the expansion of a "social shopping" platform to drive that growth.

However, Snap also seemingly underestimated the impact of Apple's (NASDAQ: AAPL) iOS update, which allowed users to opt out of data tracking features and targeted ads. That change caused it to miss analysts' revenue estimates last quarter, and could throttle its near-term growth.

Which company will be worth more by 2025?

Pinterest and Snap will both face significant challenges over the next four years. But if Pinterest stabilizes its MAU growth and continues to expand its social shopping ecosystem, its revenue should continue to rise.

If Snap stays ahead of Meta's Instagram and ByteDance's TikTok in the teen market, expands its AR and social shopping platforms, and adapts to Apple's platform changes, it could also keep growing.

Therefore, both companies should continue to grow at comparable rates through 2025. If Pinterest hits analysts' targets for 2021 and 2022, then continues to generate an average of 25% revenue growth for the following three years, it could generate $6.7 billion in revenue in 2025. If Snap follows that same path, it could generate $11.2 billion in revenue in 2025.

So even if Pinterest and Snap were trading at the same price-to-sales ratios in 2025, Snap would likely still have a much higher market cap.

Look beyond the market caps

Pinterest probably won't be worth more than Snap by 2025, but that doesn't make it an inferior investment. Both of these social media companies have clear strengths and weaknesses, and investors should focus on those issues instead of fretting over which company has the higher market cap. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Will Pinterest be worth more than Snap by 2025? appeared first on The Motley Fool Australia.

What happened 

So what

Now what

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Why Pinterest stock plunged on Monday appeared first on The Motley Fool Australia.

What happened

It's official: PayPal (NASDAQ: PYPL) is not buying Pinterest (NYSE: PINS).

After several days of dodging inquiries and declining to comment on rumors that the e-payments leader might be looking to buy the social media company in order to create a sort of social-shopping giant, PayPal finally issued a terse denial on Sunday: "In response to market rumors regarding a potential acquisition of Pinterest by PayPal, PayPal stated that it is not pursuing an acquisition of Pinterest at this time."      

Pinterest investors are obviously heartbroken -- that company's shares were down by 13% as of 9:50 a.m. EDT Monday. PayPal investors, on the other hand, are ecstatic. Shares of the fintech were up by 5%.

So what

And so, after five days of wondering, it comes down to this: Despite Monday morning's recovery, PayPal stock was still trading at a 7.1% discount to what it fetched before rumors began floating that a takeover was imminent. But Pinterest shares, too, were down -- a solid 10% from pre-rumor prices.

And for traders who tried to "buy the rumor, sell the news," well, it appears that strategy scored them a big, fat zero no matter which way they came at the deal.

Now what

That's the bad news -- but here's the good news for long-term investors: The upshot of this M&A hullabaloo is that two high-quality stocks now cost notably less than they cost a week ago.

Pinterest shares are trading at less than 15 times sales, and Pinterest stock is going for less than 13 times sales. Both companies are solidly profitable, with Pinterest earning more than $161 million in net profit over the past year and PayPal earning $4.9 billion. Earnings quality is high at both companies as well, with PayPal's $4.8 billion in positive free cash flow backing up $0.98 of every dollar of reported income. Pinterest's free cash flow is actually more than twice its reported income.

Long-term investors might want to look at Monday's sell-off as a buying opportunity. Based on the morning's price moves, it appears that this is exactly what PayPal buyers are doing. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Image-based social media company Pinterest (NYSE: PINS) is expected to report third-quarter earnings on Oct. 27. The company has fallen out of favor with the market after reporting a surprising fall in monthly active users (MAU) in its fiscal second quarter.

Pinterest gained a surge of new users and engagement on its platform at the onset of the pandemic, but that reversed in Q2 as economies reopened worldwide. The trend in MAU will be the primary concern of investors heading into third-quarter results. 

Reopening economies draw people away from Pinterest

Before last quarter, Pinterest was on a streak of adding monthly active users for 11 consecutive quarters, reaching a plateau of 478 million in fiscal Q1 of this year before shedding 24 million in Q2. Pinterest attributed the losses to consumers getting out of the house and spending less time on home computers as economies emerged from various stages of lockdown.

Nearly 7 billion doses of vaccines against COVID-19 have been administered worldwide, and thankfully they're having the desired effect of reducing the number of people getting severely ill. That has given governments around the globe the confidence to open up more facets of their economies. If that was a primary cause of Pinterest's MAU losses in Q2, the drop likely continued into Q3.

Still, investors will want to know from the company if user losses ended at some point in the quarter. It would be encouraging if management were to say that the company continued to lose users in the first half of the quarter, but then the direction turned around and it gained a modest amount of users in the second half of the quarter. 

Importantly, MAU are vital to Pinterest's business prospects. The company's site is free to join. Pinterest makes money by showing advertisements to existing users who are browsing through its platform. The more people on its platform, the more advertisements the company can sell. Pinterest's second-quarter revenue increased 125% in Q2 from the same time last year.

Additionally, it will be interesting to observe if management mentions any benefits to Pinterest from Facebook's troubles. Facebook is facing public backlash about the negative effects its platforms have on teenage girls. When Facebook faced public outrage about a different issue last year, Pinterest noted it experienced a boost in ad revenue. 

Pinterest's stock price could be tied to MAU trends

Analysts on Wall Street expect Pinterest to report revenue of $631 million and earnings per share of $0.23 in Q3, which would be increases of 42.7% and 76.9%, respectively, from the same quarter last year. As impressive as those growth figures would be, the company's stock price could fall even if it hits those targets.

That's because investors will be focused primarily on the trend in MAU, which can affect the company's long-term earning potential. And changes in variables that affect long-term results are weighted more heavily than one-time items like an individual quarter's revenue or earnings per share. Investors shall soon see. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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The rumoured move comes amid a recent push in acquisitions among fintech companies. In both the United States and Australia, the crossover between payments and e-commerce businesses is becoming a more common phenomenon.

With that being said, let's evaluate the similarities and differences in acquisitions here.

What's the big deal?

When news originally broke last night, Pinterest shares jumped around 12% higher. This was aligned with the rumoured valuation of US$39 billion that Paypal would potentially pay for the pinboard-style social platform. The speculation was met with a variety of perspectives. Some see the potential deal as a positive move for Paypal, while others were left scratching their heads.

Speaking on the positives, Mizuho senior analyst Dan Dolev said:

The key value proposition for PayPal would be to have an anchor in internet and/or e-commerce and social media, which helps diversify away from standard online checkout. Down the road, PayPal could potentially add more shopping capabilities, and boost its e-commerce presence, potentially competing with other large online retailers like Amazon.

There are similarities between Paypal's rumoured acquisition play and that of rival payment company, Square. For instance, both are financially big deals. When announced in August, Square's all-stock deal valued Afterpay shares at US$29 billion. This equates to approximately a quarter of Square's total market capitalisation. Similarly, if the rumours are correct, the acquisition value of Pinterest would be equivalent to roughly 15% of Paypal's total current value.

Another similarity is the growth profile of Afterpay and Pinterest. In the last financial year, Pinterest benefitted from a shift towards online, resulting in revenue increasing 83.6% year over year. Meanwhile, Afterpay dished out some tantalising revenue growth of its own, growing the top line by 75.4% year over year. As you would suspect, both Pinterest and Afterpay shares did similarly well.

Differences from Square's acquisition of Afterpay shares

When the Square/Afterpay combination was announced, the market was largely excited and pleased. However, opinions on Paypal's grab for Pinterest have been more mixed. This might be due to the overlaps and synergies being less clear for Paypal and Pinterest.

To the benefit of Afterpay shareholders, the company is largely built on financial technology that allows shoppers to pay in installments easily. This payment method has exploded in popularity in recent years, giving rise to new payment giants such as Klarna and Affirm Holdings Inc (NASDAQ: AFRM).

Hence, the connection between a payments processor, such as Square, and a buy now, pay later player is quite apparent. However, the compelling synergies between a social media platform and a payment processor, not as obvious.

For now, the market will need to wait for clarification from Paypal to determine whether the rumours are true. Meanwhile, it appears Afterpay shareholders are unfazed, with shares trading 0.51% higher today.

The post If Paypal buys Pinterest, what could it mean for Afterpay shares? appeared first on The Motley Fool Australia.

News broke on Wednesday that PayPal Holdings (NASDAQ: PYPL) may be considering an acquisition of visual search and media company Pinterest (NYSE: PINS). The rumor sent shares of Pinterest soaring. As of 1 p.m. EDT, the stock was up about 13%.

The timing of PayPal's consideration to buy Pinterest makes sense. The stock has been hammered this year. Before the growth stock's bump today, shares were down 16% year to date. Moreover, the stock is down 30% from all time highs -- and that includes the stock's pop on Wednesday.

Given this rumor and the stock's big gain today, what should investors do?

Buyout rumors: What you need to know

PayPal has been reportedly talking with Pinterest about buying the company for a potential price of $70 per share, Bloomberg News said on Wednesday. This would represent more than a 25% premium for Pinterest stock based on where shares were trading before this rumor started circling.

The photo- and idea-sharing website, which makes most of its money from digital advertising sales, has been morphing into a discovery platform for online purchases. Indeed, just this month, Pinterest announced new features that enabled sellers to upload product catalogs and make them discoverable to target audiences. The evolving shopping aspect of Pinterest's platform may be one thing that makes the potential acquisition attractive to digital payment juggernaut PayPal.

What should investors do?

Given the stock's sudden surge, current Pinterest shareholders may be tempted to do some profit-taking. And prospective investors may be considering buying the stock in hopes that the potential acquisition is more than just a rumor. After all, the rumored $70 price tag still represents a 13% premium from where shares are trading at the time of this writing.

While it's tempting to take action on this news, oftentimes in investing it's best to lean toward inaction over action.

For investors who already owned Pinterest stock, there was likely something about the underlying business that seemed attractive to them. Pinterest's core business remains -- and it will remain even if the acquisition never pans out. So why sell today?

For investors who didn't own the stock, there was likely a reason they were avoiding it already -- so they shouldn't rush to buy shares out of speculation that they'll see a short-term pop. After all, it's always possible that an acquisition never comes to fruition.

So, are Pinterest shares a buy, sell, or hold today? It's likely wise to consider them a hold -- at least until there's more clarity about whether the company will remain independent or not. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Pinterest stock: Buy, sell, or hold ahead of possible buyout? appeared first on The Motley Fool Australia.

What happened

Shares of PayPal (NASDAQ: PYPL) stumbled on Wednesday, falling as much as 6.8%, though the stock recovered a bit, ending the trading day down 4.7%. The catalyst that sent the fintech leader lower were reports that it might be expanding into new markets via a massive acquisition.

So what

Reports surfaced early in the day that PayPal had made overtures to acquire social-media site Pinterest (NYSE: PINS). Bloomberg dropped the story, citing the oft-quoted "people with knowledge of the matter," which sent Pinterest stock soaring. 

The report had the opposite effect on PayPal. Investors were likely concerned about the proposed acquisition price for Pinterest of roughly $70 per share.

As of Jul. 23, 2021, Pinterest had more than 555 million shares of Class A common stock outstanding and more than 89 million shares of Class B shares, which, taken together, would value Pinterest at more than $45 billion. For context, PayPal currently has a market cap of roughly $300 billion, so an acquisition of this magnitude could have a significant impact on PayPal's business -- particularly if things go south.

The report didn't specify when these discussions happened, though an updated version of the report said, "Terms of a transaction could still change, and there's no certainty the talks would lead to an agreement." 

Now what

PayPal has been looking to expand beyond its digital-payments business and has been working to become a "destination app" as a way to help users take control of their financial lives. Last month, the company added a host of new features and services, taking it one step closer to what some are calling a "super app."

The added functionality includes a high-yield savings account, in-app shopping tools, up to two-day early access to direct deposit funds, bill pay, and deals and rewards for users. In the coming quarters, PayPal plans to expand its features even more, adding investment capabilities and purchasing with cryptocurrency.

By joining forces with Pinterest, PayPal would establish a sizable beachhead in social commerce, a natural extension of its payments business.

Thus far, neither PayPal nor Pinterest has confirmed the reports. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Why PayPal investors got nervous on Wednesday appeared first on The Motley Fool Australia.

Some of the most popular stocks in the market include SentinelOne and Bill.com, each trading at price-to-sales ratios of more than 100, making them among the most expensive out there.

However, the great Warren Buffett once said: "For the investor, a too-high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favorable business developments."

In other words, it doesn't matter how popular or fantastic a business is; if you pay too much for the stock, your returns may disappoint you. Visual search engine Pinterest (NYSE: PINS) has been beaten down since its last reported earnings. Here are three reasons why Pinterest is a buy today.

1. Monetization is in the early stages

Pinterest is by no means a small platform; there are currently 454 million monthly active users (MAUs) worldwide, and it is a truly global business with 80% of its MAUs from outside of the U.S. The company is lumped in with other social media platforms like Facebook and Twitter, but Pinterest describes itself as a visual search engine.

Its users come to Pinterest looking to be "inspired," searching for decoration ideas, recipes, travel destinations, and anything else where a user can take an idea in their head and find a visual to pair it with.

The company only just recently began focusing on implementing tools to monetize the traffic on its platform, rolling out several features that are still new or not yet fully launched, including ad tools, e-commerce integrations with partners like Shopify, video Pins, and the ability to tag products in Pins.

Pinterest is working to generate advertising revenue by blurring the lines between e-commerce and social media, where users find a great Pin and have the option to buy a product directly from it.

These efforts have begun to dramatically accelerate Pinterest's average revenue per user (ARPU). In Q1 of 2020, Pinterest generated an average of $0.77 per user in revenue on its 367 million MAUs. Fast-forward to the company's Q2 2021, five quarters later, and Pinterest generated $1.32 per user on 454 million MAUs. In just over a year, Pinterest has grown its user base by 24% and is making 71% more revenue on each MAU.

Facebook's average user created $10.12 in revenue for its Q2 2021, more than seven times Pinterest (and Facebook continues to improve its monetization), so there appears to be considerable room for Pinterest to grow its revenue per user over time.

2. The financials are already strong

Pinterest has seen strong revenue growth from the combination of attracting more users and generating more revenue from each. Total revenue grew 125% year over year in Q2 2021, to $613 million.

A rapidly growing business is often unprofitable because the company reinvests everything back into itself for growth, but that isn't the case with Pinterest. In the same quarter that revenue grew 125%, Pinterest posted a positive EBITDA of $178 million and has been EBITDA-positive over the past four quarters.

While revenue grew 125% year over year, Pinterest's Q2 expenses increased at a slower rate. For example, its cost of revenue and research and development expenses increased just 19% and 23%, respectively, compared to 2020.

As Pinterest continues to grow revenue faster than its expenses, this should result in accelerated profit growth. Investors should monitor the company's bottom line to see this through over coming quarters.

3. The stock is discounted

Pinterest is currently expected to earn $2.6 billion in revenue for the full 2021 year, a 54% increase over 2020. The stock's price-to-sales ratio is currently 14. Let's compare that to Bill.com, mentioned at the top of the article.

Bill.com just announced its most recent quarter, where it grew revenue 86% year over year, and the company posted a net loss for the quarter. Bill.com is in "growth mode," so we need to acknowledge its strong 74% profit margins, but does it deserve a valuation that is many multiples higher than Pinterest? Let's remember that Pinterest just grew 125% and is already profitable.

Buy the Buffett way

The stock market doesn't always make a lot of sense in the short term, where sentiment more than anything dictates whether stocks go up or down. Fundamentals matter more over the long term, and Pinterest has the growth and profitability to eventually rebound from where it currently trades.

Going against the grain and not buying the stocks that everyone loves can feel uncomfortable, and that's OK. Buying quality companies at a discount often proves the more lucrative strategy over time, and Pinterest could be the latest example of that. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Warren Buffett's advice makes this stock a buy appeared first on The Motley Fool Australia.

ARK is a funds management business over in the United States. Ms Wood is its founder, CEO and chief investment officer. ARK has gained its fame through its suite of exchange-traded funds (ETFs), which specialise in high-growth, future-facing and disruptive companies, usually in the tech space. Ms Wood first rose to fame with her uber-bullish views on some prominent tech shares.

Wood drew a lot of eyeballs a couple of years ago with her unabashedly optimistic views on the electric car and vehicle manufacturer Tesla Inc (NASDAQ: TSLA). Back in May 2019, Cathie Wood surprised even the more bullish investors of Tesla when she spruiked a US$5,905 share price target for the company. At the time, Tesla was a US$40 share (adjusted for last year's stock split). It was also just before Tesla went on its millionaire-minting run. Over the following year or two, Tesla was to shoot up more than 1,100% in value. The fact that Ms Wood was one of the first investors to come out of the gates with such a bullish price target for Tesla earned her and Ark a lot of respect in hindsight.

Growth at scale

But since the days of calling Tesla's success, Cathie Wood and ARK also put some pretty convincing runs on the board. Its flagship fund – the ARK Innovation ETF (NYSE: ARKK) – returned an impressive near-40% in 2019, and almost 150% in 2020. ARK Innovation is a fund that incorporates the 'best ARK picks' from its other, more sector-specific ETFs. Between 1 January 2021 and 12 February, it added another ~25% or so. That's enough performance to catch any investors' eye. Other ARK ETFs performed similarly well, if not better, over these time frames. 

But since February 2021, things haven't been entirely 'coming up Milhouse' for ARK funds. The ARKK ETF has corrected sharply since February when it reached its peak of US$159.70 a unit. On today's pricing, ARKK units are back to US$112.28, giving up more than 28% off of that high.

So is ARK a spent force? Let's take a deeper dive.

What's in an ARK ETF?

Here are the top holdings, and their weightings, in the flagship ARKK ETF, as of 27 May:

As you can see, the fund is heavily weighted to high-growth tech shares. We have Tesla (naturally taking out a large chunk at the top there. But we also have companies like Roku, Square, Shopify, Spotify, Zoom and Coinbase.

These companies are all very similar in nature. They are disruptive, tech-based companies that have long growth runways, and a lot of future potential. But they are also not too profitable today, and still very much in 'growth phase'. These companies are at the stage of their lives where they are prioritising revenue growth over profitability. That's why most of them don't even have price-to-earnings (P/E) ratios yet. Or if they do, they are normally in the triple-digits. Take Tesla. Its P/E ratio is currently sitting at 635.7.

What about some other ETFs?

We see similar patterns in some of ARK's other popular ETFs.

Here are the top ten holdings for the ARK Fintech Innovation ETF (NYSE: ARKF) fund:

And here is what the ARK Next Generation Internet ETF (NYSE: ARKW) fund holds:

Again, very similar businesses – high growth, disruptive, priced for future profitability rather than the money they make today.

So why have ARK funds had a bad few months?

And now we can look at the main problem that these funds face. They tend to do well, really well, when the market is running hot, and growth companies are 'in vogue'. By definition, growth companies tend to outperform the broader markets during a bull run and underperform during a bear market. 2019, and post-COVID 2020 were decidedly the former.

But why the underperformance since February 2020? After all, the US S&P 500 Index (INDEXSP: .INX) has gone and pushed to more record highs since 12 February. Most recently on 7 May.

Well, another factor at play has been fears of inflation and rising bond yields, which have spiked in the months since 12 February. According to CNBC, the US 10-year Treasury yield was well under 1% at the start of 2021 and was around 1.18% on 12 February. This yield reached a high of roughly 1.75% in late March and still stands at 1.61% today.

Rising bond yields typically turn sentiment against companies who are being priced on future earnings, rather than what they offer today. In other words, most of the stocks that ARK funds hold. We saw similar gyrations in our own ASX tech sector between February and May.

What does the future hold for ARK?

The big corrections in the value of Ark funds over the past few months might have dented some of the optimism that many of its investors would have been feeling in the months and years prior. But if the market was once again to fall back in love with the kinds of future-facing tech companies that ARK invest in, it is conceivable that we will see ARK funds back at all-time highs. Time will only tell. But Cathie Wood and ARK are probably not going away anytime soon regardless – as barometers of high-octane growth stock investing if nothing else.

The post An ASX guide to Cathie Wood and ARK Invest ETFs appeared first on The Motley Fool Australia.