Pinterest's (PINS -2.85%) stock recently plummeted after the company posted mixed first-quarter numbers. Its revenue grew 35% annually to $272 million and beat estimates by $1 million, but its adjusted net loss widened from $40 million to $60 million, or $0.10 per share, which missed expectations by a penny.
Pinterest didn't offer any guidance due to the COVID-19 pandemic, but it warned that its gross margins would contract as the cost of supporting new users overwhelmed its growth in ad revenue, and its operating expenses would rise. In other words, investors should expect slower revenue growth with wider losses.
Investors clearly weren't pleased with that grim outlook, but is Pinterest still a good long-term investment? Let's take a look at Pinterest's past growth, its plans for the future, and where the stock could end up in five years.
How fast is Pinterest growing?
Pinterest went public last April at $19 per share, but the stock dipped below its IPO price following its latest report. Pinterest's full-year revenue rose 51% in 2019, as its global monthly active users (MAUs) grew 26% to 335 million.
Pinterest's MAUs rose another 26% year over year to 367 million in the first quarter. Its international MAUs climbed 34% to 277 million, and its U.S. MAUs grew 6% to 90 million, but it still generates significantly less average revenue per user (ARPU) overseas.
Wall Street expects Pinterest's revenue to rise just 14% this year due to the pandemic and other macro pressures, but accelerate to 34% growth next year as those headwinds wane. Pinterest is expected to remain unprofitable this year, but possibly generate a slim non-GAAP profit by 2021.
Investors shouldn't put too much faith in those long-term estimates, since the fallout from COVID-19 remains hard to quantify. Nonetheless, Pinterest will likely face sluggish growth this year as advertisers rein in their spending and rising expenses turn its growth in users into a double-edged sword.
What are Pinterest's long-term goals?
Pinterest carved out a niche in the crowded social networking market with virtual pinboards that showcased a user's hobbies and interests.
Facebook (META -3.09%) chased Pinterest with Instagram's collections and the new Hobbi app, and Alphabet's (GOOG -3.74%) (GOOGL -3.72%) Google challenged Pinterest with a "Collections" feature for saving images and search results -- but none of those efforts has curbed Pinterest's growth yet.
To differentiate its platform, Pinterest launched "shoppable" pins and allowed retailers to upload their entire catalogs. Last year, Cowen & Co. claimed 48% of Pinterest's users used the platform to find and shop for products, compared to just 14% of Facebook's users and 10% of Instagram's users.
Pinterest is well suited for apparel, home goods, and travel, since users can passively convince their followers to buy the same products or experiences. That cycle is arguably more organic than the creation of targeted ads on Facebook, Instagram, and Google, and makes it a potential leader in the "social shopping" space. Its long-standing partnership with Shopify, which allows smaller merchants to sell their products on Pinterest, could complement that growth.
Another top priority for Pinterest is the improved monetization of its international users, who now account for over three-quarters of its MAUs. Its international ARPU jumped 76% annually to $0.13 last quarter, but that was dwarfed by its domestic ARPU, which grew 18% to $2.66. Closing that gap could require some margin-crushing investments.
Pinterest also wants to diversify its ads away from the apparel, home, and travel sectors, while encouraging users to pin more videos. Those efforts could strengthen its defenses against fierce rivals like Instagram, which also offers shoppable posts on its larger platform.
A promising company with a lot to prove
Pinterest is still growing, but its losses are widening and its stock isn't cheap at about eight times this year's projected sales. Facebook, which is firmly profitable, trades at less than 8 times this year's sales.
Pinterest's MAUs could continue rising over the next five years, but the costs of maintaining that growing user base could offset its ad revenue and make it tough to ever generate a profit. Meanwhile, the expansion of the nascent social shopping market could eliminate Pinterest's first mover's advantage as other platforms promote their shoppable posts. Its overseas growth could decelerate as regional competitors launch similar apps.
In short, Pinterest is a promising company that still has a lot to prove. I believe it could head higher over the next five years, but constant pressure from competitors and concerns about its losses could prevent it from outperforming its bigger industry peers.