Should Investors Worry About Pinterest's Slowing User Growth?

Pinterest (PINS +0.00%) recently posted its first-quarter earnings. The social media company's revenue soared 78% year-over-year to $485.2 million, beating estimates by $10 million and marking its strongest growth since its IPO two years ago.

On the bottom line, it posted a non-GAAP net profit of $78.5 million, compared to a net loss of $59.9 million a year earlier, while its non-GAAP EPS of $0.11 beat expectations by four cents. Its adjusted EBITDA also improved from a loss of $53.3 million a year ago to a profit of $83.8 million.

Image source: Pinterest.

Those headline numbers were impressive, but Pinterest's stock sank after its monthly active user (MAU) growth missed expectations and it forecast even slower MAU growth in the second quarter. Should investors worry about that slowdown, or does the dip represent a buying opportunity?

Tracking Pinterest's user growth

Pinterest's MAUs rose 30% year-over-year to 478 million, which missed the consensus forecast of 480.5 million MAUs and represented its slowest user growth in four quarters:

Data source: Pinterest. YOY = Year-over-year.

Pinterest's MAU growth accelerated throughout the pandemic as stay-at-home measures caused more people to search for fashion, cooking, education, and other hobbies on its virtual pinboards. However, Pinterest's MAU growth in the U.S. still stalled out at 98 million over the past three quarters. It offset that slowdown with the growth of its overseas MAUs, who now account for 79% of its total MAUs.

Data source: Pinterest. YOY = Year-over-year.

That shift is troubling because Pinterest generates much lower average revenue per user (ARPU) from its international users. That's why its international users still only generated 20% of its first-quarter sales.

Pinterest's total ARPU increased 34% year-over-year to $1.04 during the first quarter. Its U.S. ARPU rose 50% to $3.99, while its international ARPU jumped 91% to $0.26. Pinterest intends to increase its international ARPU as it expands into new markets in Latin America and Asia, but it should still generate much higher revenue from its domestic users for the foreseeable future.

Expectations for a post-pandemic slowdown

Pinterest expects its global MAUs to only grow in the "mid-teens" in the second quarter of 2021, with flat year-over-year growth in U.S. MAUs. That forecast suggests it could actually lose two million MAUs in the U.S. on a sequential basis. It didn't offer any forecasts for its overseas growth.

Image source: Pinterest.

During the conference call, CEO Ben Silbermann said the pandemic brought more users to Pinterest, but that "as pandemic lockdowns were eased in some parts of the world during mid-March, we began to see signs of less engagement and user growth on Pinterest, and we assume this means people are spending more time off-line."

Pinterest still expects its revenue to grow 105% year-over-year in the second quarter, but it will benefit from an easy comparison to its 4% growth in the year-ago quarter -- which bore the initial impact of the pandemic. Those comparisons will become more challenging in the second half of the year, and analysts expect its revenue to rise 52% for the full year.

As Pinterest's MAU growth decelerates, it plans to increase its operating expenses by the "mid-teens" sequentially in the second quarter to ramp up its marketing campaigns and other long-term initiatives.

CFO Todd Morgenfeld warns that its new marketing campaigns will "drive a substantial or sizable increase" in its variable spending and potentially throttle its earnings growth. That spending could make it tough for Pinterest to meet Wall Street's rosy expectations for 119% earnings growth this year.

The road ahead

I own shares of Pinterest, but its slower MAU growth and its plans for higher spending indicate it will face a tougher post-pandemic slowdown than Snap (SNAP +0.17%) and Facebook (FB +1.81%), which both recently posted strong quarterly growth with rosy forecasts for the future.

Pinterest gained a lot of users as they stayed home and searched for hobbies or interests online, but that interest could fade as the pandemic passes.

Pinterest still has plenty of growth potential, especially in the social commerce market, but the next few quarters could be challenging as it attempts to gain more U.S. users, monetizes its overseas users, and ramps up its spending to strengthen its brand and expand its ecosystem. Investors can consider nibbling on Pinterest after its latest pullback, but they should also expect a lot more volatility this year.