Are Investors Too Bullish on Pinterest’s Overseas Prospects?

Pinterest's (PINS 4.04%) stock recently surged after the social media company's second-quarter numbers beat Wall Street's expectations. Its revenue rose 4% annually to $272 million, beating estimates by $18 million. Its adjusted net loss widened from $24.5 million to $38.4 million, or $0.07 per share, but still cleared estimates by $0.06.

At first glance, Pinterest's headline numbers don't seem to justify its post-earnings gains. Nonetheless, its overseas growth in monthly active users (MAUs) and revenue attracted a stampede of bulls. Let's dig deeper into Pinterest's international business and see if that enthusiasm is justified.

Image source: Pinterest.

How quickly is Pinterest's international business growing?

Pinterest's total MAUs rose 39% annually to 416 million during the quarter, marking its strongest user growth since its IPO last year. Most of that growth came from its international users:

Data source: Pinterest. QOQ = quarter over quarter. YOY = year over year. Source: Pinterest.

During the conference call, Pinterest CEO Ben Silbermann attributed the company's accelerating MAU growth to "resurrected users" and "users under the age of 25, who grew twice as fast as users over 25." That statement indicates Pinterest is expanding beyond its core market of older female users.

Silbermann noted the COVID-19 crisis attracted more users, who "came looking for ideas" for home office setups, recipes, activities for kids, and other topics during the pandemic. Catalog uploads from retailers, who share their online catalogs via shoppable pins, also rose over 350% sequentially -- which supports Pinterest's evolution into a social e-commerce platform.

CFO Todd Morgenfeld attributed Pinterest's international growth to "a lot of investments" in localized sales and support teams, which he said were "paying off nicely." That's why Pinterest's international revenue growth outpaced its domestic growth by a significant margin during the quarter:

Data source: Pinterest.

But its international users generate less revenue

However, Pinterest's international users generate significantly less revenue than its domestic users. Its international average revenue per user (ARPU) rose 21% annually to $0.14 during the second quarter, but that paled in comparison to its domestic ARPU of $2.50, which declined 11% from a year earlier as ad spending dried up throughout the pandemic.

That's the same problem Facebook (META 0.43%) faces: Its highest-growth markets generate far less revenue than its slower-growth ones. But unlike Facebook, which has expanded across both English and non-English speaking markets, Pinterest has only expanded into English-speaking markets outside the U.S. (especially in Western Europe) so far. 

During the call, Morgenfeld said Pinterest was "seeing exceptionally strong growth across all geographies" and that it expects "to monetize a significant majority of our users over the next couple of years." Pinterest plans to expand into Latin America next, but it doesn't intend to monetize those users until about half a year later.

Therefore, Pinterest's international ARPU should remain much lower than its domestic ARPU, even if its year-over-year growth rates seem impressive.

Its overseas expansion could be costly

Pinterest's user growth accelerated, but sluggish ad spending throughout the COVID-19 crisis throttled its revenue growth. Meanwhile, it grew its headcount 21% annually during the quarter, and expects its operating expenses to rise both sequentially and annually in the third quarter.

Pinterest plans to plow more cash into the expansion of its user and advertiser base, especially overseas, and new e-commerce features. Those investments could keep Pinterest unprofitable for the foreseeable future.

Image source: Pinterest.

However, Pinterest saw a "sharp acceleration" in its revenue growth in July as businesses reopened, and it expects its revenue to rise more than 30% annually in the third quarter. It didn't parse that forecast by its domestic and international markets or offer any full-year guidance, but that confident outlook tells us two things.

First, Pinterest firmly controls its social media niche, which can't be breached by clones like Facebook's Hobbi and remains a lucrative platform for advertisers. Second, Pinterest is unprofitable, but its robust revenue growth will buy it more time to monetize its international users.

Are investors too bullish on Pinterest's overseas growth?

Pinterest's international user growth in the second quarter was impressive, but its revenue growth barely offset its decline in domestic revenue. Pinterest is still a solid growth stock, but the enthusiasm regarding its international growth seems premature -- especially when it expects that monetization to occur over the next few years instead of a couple of quarters.