Wall Street got its first taste of Pinterest (NYSE:PINS) during earnings season, and it wasn't pretty. Shares of the social discovery platform plunged 13.5% on Friday, rattling investors who were blindsided by its sloppy report.
The problem with Pinterest's first quarter as a public company is that we already knew most of the good news about user and revenue growth as well as how the dot-com darling was succeeding in monetizing its traffic. All of this was spelled out in its mid-April prospectus. Pinterest failed in that it filled in the blanks with disappointing numbers. A wider-than-expected quarterly loss and guidance calling for decelerating growth slowed the Pinterest party in its tracks.
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No one was going to celebrate revenue rising 54% to $201.9 million through the first three months of the year. It was the high end of the range it offered, and since that forecast was done a couple of weeks after the actual quarter ended, it would've been a shock if it didn't land at the top of that narrow range. The same can be said about the 22% climb to 291 million monthly active users and the 26% improvement in average revenue per user.
One of the disappointing aspects of Pinterest's report is that it posted a bigger loss than analysts were expecting, but the real culprit here is Wall Street. Pinterest actually came in with a better performance than the operating loss and adjusted EBITDA that it was modeling back in mid-April. Analysts just got too optimistic with how all of that would play out on the bottom line.
The one disappointment that can be pinned squarely on Pinterest's shoulders is the uninspiring guidance. It initiated its full-year outlook last week, and the $1.055 billion to $1.08 billion that it's targeting is just 40% to 43% ahead of where it landed in 2018. After seeing revenue growth accelerate from 58% in 2017 to 60% in 2018, it was only natural to expect a slowdown. However, with investors already knowing about the 54% uptick on the top line in the first quarter, this doesn't bode well for the balance of this year. Backing out the first quarter results of 2018 and 2019, Pinterest's guidance is really saying that revenue will grow 37% to 41% in the final nine months of this year.
Pinterest could've overcome slowing top-line growth if it were about to break into profitability, but that's also a stretch. The $45 million to $70 million deficit in adjusted EBITDA that Pinterest is modeling for all of 2019 points to a hole between $6.6 million and $31.6 million through the next three quarters combined on that front.
Investors can't be hurting too badly here. Pinterest begins this week trading 41% higher than last month's IPO price of $19 last month. Even after Friday's drop, it still closed higher than it did last Monday, as the shares rallied into earnings.
There is still a lot to like at the visual search engine, and its lifestyle appeal is in the sweet spot of groups that advertisers would pay well to reach. Pinterest will still need to do better at this point. If revenue growth decelerates sharply, it will need to break into profitability to justify its model. If the losses continue, it better come because Pinterest is paying for headier growth than it's currently projecting. Pinterest needs to get the balance right.