Pinterest Stock's Post-Earnings Drop Is a Buying Opportunity

Pinterest (PINS 0.43%) reported strong first-quarter 2020 results after the closing bell on Tuesday, April 27. However, shares of the image-discovery platform operator are down 12.2% on Wednesday, as of 10:56 a.m. EDT.

We can attribute the market's initial negative reaction to year-over-year user growth slowing in the United States, and the company's guiding for this dynamic to continue in the second quarter. This slowing -- which was to be expected -- is being driven by the easing of COVID-19 pandemic restrictions in the country, which is resulting in people spending less time online. 

That said, there was much to like in the report: Both revenue and earnings beat Wall Street's expectations, and the company's second-quarter revenue guidance came in higher than the analyst consensus estimate. Moreover, advertising rates across the world are rebounding strongly. 

The market is overreacting, in my view. For investors looking to buy shares of Pinterest, this could be your opportunity, at least to start dollar-cost averaging your way into your full position. 

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 continuing rebound in global advertising spending from the pandemic-driven downturn and by an increase in the number of monthly active users of the site.

Wall Street was looking for adjusted EPS of $0.07 on revenue of $472.7 million, as outlined in my earnings preview. So Pinterest surpassed both expectations. It also did the same to its own revenue guidance, which was for growth in the low-70% range year over year. (The company didn't provide earnings guidance.)

For context, in Q4 2020 -- the big holiday quarter -- Pinterest's revenue soared 76% year over year to $705.6 million. Growth was driven by a 37% year-over-year increase in the number of monthly active users (MAUs) to 459 million and a 29% rise in global average revenue per user (ARPU) to $1.57. Also in Q4, adjusted EPS skyrocketed 258% to $0.43. Results for both the top and bottom lines easily beat Wall Street's expectations.

Key user and operational stats

Data source: Pinterest. YOY = year over year.

The number of MAUs in the U.S. rose 9% year over year to 98 million, while the number of international MAUs jumped 37% to 380 million.

About 80% of Pinterest's total Q1 revenue was generated from ad sales in the U.S., even though 79% of its total users are international users. This is because it realizes a much higher average price per ad in this country. U.S. ARPU soared 50% year over year to $3.99, while international ARPU rocketed 91% to $0.26. There's a big spread in ARPU by geographic category because many of the company's international users are in developing countries where advertising rates are low.

Second-quarter guidance is robust

Management expects Q2 revenue will grow about 105% year over year. This outlook is brighter than Wall Street had been expecting. Going into the release, analysts had been modeling for Q2 revenue to increase 94% year over year.

Management also said it expected "Q2 global MAUs to grow in the mid-teens and U.S. MAUs to be around flat on a year-over-year percentage basis." 

That Pinterest guided for U.S. MAU year-over-year growth to stall in Q2 is probably the biggest factor behind the stock's decline on Wednesday.

However, investors should keep two things in mind: First, advertising rates should continue to climb in the U.S. (and in many international markets) as the economy continues to rebound from the pandemic. Second, in Q2, the company will be facing an ultra-tough year-over-year U.S. user comparable. The second quarter of last year was the first full quarter following stay-at-home orders being issued in mid-to-late March by most U.S. states.