Shares of visual search and media platform company Pinterest (PINS -1.13%) were pummeled Wednesday. By the time the market closed, shares fell about 15%. The beating followed Pinterest's first-quarter earnings release and was due to its slower-than-expected user growth during the period.
But the market may be overreacting. Even more, the stock's sharp sell-off looks like a great buying opportunity for investors.
Here's a closer look at Pinterest's first-quarter update -- and why the stock may be a good buy today.
Don't overlook Pinterest's surging revenue
Pinterest's monthly active users grew 30% year over year to 478 million in Q1. Unfortunately, this was slightly worse than the approximately 480 million users the consensus analyst estimate called for. Further, management guided for the key user metric to increase at a year-over-year growth rate in the mid-teens in the second quarter. The expected deceleration may have spooked some investors.
But investors focusing too much on Pinterest's monthly active user numbers may be missing the company's exciting top-line growth. First-quarter revenue soared 78% year over year to $485 million.
"We saw increased demand from mid-sized and small managed advertisers, who contributed nearly 50% of total revenue in Q1," Pinterest management said about the company's top-line momentum during the period, "as well as an acceleration in conversion-based revenue, with significant share running through automatic bidding."
Looking to Q2, management guided for revenue to grow 105% year over year. Pinterest is lapping some easy comparisons during the quarter as the pandemic caused many marketers to pause or reduce their ad spend during the second quarter of 2020. Management's Q2 revenue guidance, however, was ahead of the 95% growth rate that analysts had modeled for.
A growth stock worth owning for the long haul
This could be one of those cases when famed investor Warren Buffett's advice to "be greedy when others are fearful" could work out handsomely for investors who buy shares of this growth stock today. Pinterest's business is firing on all cylinders yet its stock fell double digits.
While investors should expect a deceleration in the company's monthly active user growth as the economy reopens and people spend less time on their devices at home, Pinterest is still squarely in growth mode. Even more, its business model is showing signs of scalability. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) during the quarter swung from negative $53 million in the first quarter of 2020 to positive $84 million (or 17% of revenue). Though COVID-related cost savings were part of the driver of this improvement, much of it had to do with the scalability associated with Pinterest's revenue growth.
With the top-line growth rates Pinterest is serving up, these still seem to be early days for the visual search and media platform. Further, as the company achieves greater scale, its bottom line could eventually be quite substantial, making this week's pullback in the stock price look like a great buying opportunity in retrospect.
Of course, there's no guarantee that Pinterest can keep growing at rapid rates in the years ahead. But if the company's execution over the last few years is any indication of its long-term potential, the stock's recent double-digit decline is a great buying opportunity.