Pinterest's Earnings Demolish Expectations; Stock Soars 31%

Pinterest (PINS 0.05%) reported powerful third-quarter 2020 results after the closing bell on Wednesday, Oct. 28.

Shares of the image-discovery platform operator skyrocketed 31.5% in after-hours trading on Wednesday, suggesting their performance during Thursday's regular trading session will be an early Halloween treat for investors. We can attribute investors' delight to revenue and earnings both demolishing Wall Street's expectations and fourth-quarter revenue guidance also coming in much higher than the analyst consensus estimate. 

In 2020, Pinterest stock is up 164% through Wednesday's regular trading session, compared with the S&P 500's 2.8% return. (And it's up 247% for the year through Wednesday's after-hours session.)

Here's how the quarter worked out for Pinterest (which held its initial public offering, or IPO, in April 2019) and its investors.

Image source: Getty Images.

Pinterest's key numbers

Data source: Pinterest. GAAP = generally accepted accounting principles.

Revenue growth was driven by a rebound in global advertising spending from last quarter's pandemic-driven downturn, and an increase in the number of monthly active users of the site. The COVID-19 crisis has provided a tailwind to user growth since people are staying home more than usual. 

Wall Street was looking for adjusted EPS of $0.02 on revenue of $377.7 million, so Pinterest absolutely crushed both expectations. It also did the same to its own revenue guidance, which was for growth of about 30% year over year. (The company didn't provide earnings guidance.)

To understand just how poorly Wall Street did at projecting the company's revenue, consider this fact: The highest estimate among the top-line estimates provided by 23 analysts was only $392 million.

For context, in the second quarter, Pinterest's revenue grew just 4% year over year to $272.5 million. Growth was so anemic because global advertising spending dropped sharply in this quarter due to the pandemic. In Q2, GAAP net loss per share improved to $0.17 from $2.62 in the year-ago period. Adjusted for one-time items, loss per share widened to $0.07 from $0.06.

Key user and operational stats

Data source: Pinterest. YOY = year over year.

The number of MAUs in the U.S. rose 13% year over year to 98 million, while the number of international MAUs jumped 46% to 343 million.

About 84% of Pinterest's total Q3 revenue was generated from ad sales in the United States even though it has many more international users. This is because it realizes a much higher average price per ad in this country. Indeed, U.S. ARPU grew 31% to $3.85, while international ARPU increased 66% to $0.21. So currently, the addition of one new U.S. monthly active user is equivalent to the addition of 18 new international MAUs. This huge spread is because many of the company's international users are in developing countries.

For context, social media giant Facebook (which is scheduled to report its Q3 results on Thursday after the market close) had 2.7 billion global MAUs at the end of the second quarter. So, Pinterest has plenty of user growth potential.

Fourth-quarter guidance makes for a pin-worthy picture

Management expects fourth-quarter revenue will grow about 60% year over year. This outlook is significantly brighter than Wall Street had been expecting. Going into the release, analysts had been modeling for Q4 revenue to increase 32% year over year.

Moreover, it seems pretty safe to assume that management lowballed its Q4 revenue outlook due to the uncertainty surrounding the pandemic and knowing full well the market is usually unforgiving to companies that miss their own guidance. 

Pinterest is a company that Wall Street doesn't have a good handle on. This type of situation can present an excellent opportunity for investors.