March was a rough month for shareholders of Pinterest (NYSE:PINS), as the stock was down 20.8% according to data provided by S&P Global Market Intelligence. The COVID-19 pandemic caused most stocks to be down during the month. But if you peruse Pinterest's press releases and SEC filings, you won't find any coronavirus-related news to explain why this stock has lost so much value.
But there's a simple explanation. Pinterest generates revenue from advertising, and there's reason to believe companies are spending less on advertising during this time.
Pinterest is an under-monetized productivity app. In the fourth quarter of 2019, average revenue per user (ARPU) was only $1.22. But it's steadily improving as the company proves its value to advertisers. As evidence of this, monthly active advertisers grew 125% year over year in Q4. Its ability to improve its advertising business like this is a core part of any Pinterest investment thesis.
However, advertisers are now cutting spending because of economic conditions brought about by the coronavirus. According to a March survey by the Interactive Advertising Bureau (IAB), 24% of companies won't be spending on advertising at all in the first half of 2020, while another 46% are making downward adjustments. This reality was confirmed when Twitter withdrew its first-quarter guidance in part due to decreased advertising demand.
While Pinterest hasn't given an update regarding its current ad spend, it's reasonable to assume it's seeing this same trend play out on its platform.
Pinterest essentially grows in two ways. First, it grows by adding new users. Second, it grows by increasing its ARPU. When it comes to new user growth, Pinterest is doing quite well. In Q4, monthly average users increased 26% year over year to 335 million. That growth shouldn't slow in coming quarters due to COVID-19.
If ad dollars are drying up for the time being, it's reasonable to assume they'll come back. After all, advertising and capitalism go hand in hand. The question no one can answer right now is how long it will take. That being said, I like Pinterest's ability to wait out this storm. It's debt-free with $1.7 billion in cash, cash equivalents, and marketable securities.
If Pinterest's ARPU drops in coming quarters due to COVID-19, investors should stay calm and shift focus to user growth. Continued strong user growth now will create a long-term tailwind when advertisers resume spending later, confirming its status as a top growth stock.