On April 27, Pinterest (NYSE:PINS) reported results for the first quarter of 2021, showing impressive top-line growth. Revenue was up 78% year over year to $485 million. Moreover, management expects second-quarter revenue will be even better, projecting 105% growth from the year-ago period. In short, business is booming for Pinterest.
These revenue figures were what made headlines for the company last week, but they're not the numbers that excite me the most as a Pinterest shareholder. Rather, a mere $0.26 shows how much progress the company is making and compels me to believe that the long-term growth thesis is playing out right before our very eyes.
Why investors don't care about international metrics
Pinterest breaks out a metric called average revenue per user (ARPU), as do other companies. The company also gives shareholders further clarity by providing ARPU for the U.S. and internationally. In the first quarter, U.S. ARPU was $3.99, up a sharp 50% year over year. By comparison, international ARPU was a mere $0.26. In other words, Pinterest generates 93% less revenue per international user than it does per U.S. user.
For the record, international ARPU commonly trails U.S. ARPU for companies like Pinterest. For example, for Snapchat's parent company Snap, its ARPU for the U.S. is $5.94 as of the first quarter of 2021. But ARPU for Europe is much lower at $1.48, and the rest of the world is lower still at just $0.93. Both Snap and Pinterest generate revenue by displaying ads, and ad budgets in the U.S. are simply bigger than those in many other countries, partially explaining the disparity.
Because international ARPU drastically lags behind U.S. ARPU, Pinterest generates relatively little revenue internationally. In the first quarter, international revenue was just 19.5% of its total revenue. Therefore, some investors feel like they should focus on what's happening in the U.S. -- after all, that's where most of its money is coming from.
Pinterest's stock price plunged following its first-quarter report because investors are focused on the U.S., and Wall Street doesn't like its slowing user growth there. In the first quarter, monthly active users in the U.S. were only up 9% year over year. And for the second quarter, management expects U.S. user growth to flatten out entirely. But I believe investors are focusing on the wrong thing.
Why you should care about international metrics
Yes, Pinterest's international ARPU was just $0.26 in the first quarter. But this minuscule number masks colossal growth taking place under the surface. Let me hit you with two crucial first-quarter numbers that frame the hidden story:
- International monthly active users increased 37% year over year to 380 million.
- International ARPU increased 91% from last year.
This is compound growth for Pinterest's international user base (user growth plus monetization improvements). The result is the company's international revenue was up a whopping 170% in the first quarter.
Also keep in mind that Pinterest's international segment is the larger user base by a mile: 380 million versus just 98 million. And it's still growing at a blistering pace. Management is guiding for continued double-digit percentage growth in its overseas user base in the second quarter.
Pinterest's management is just starting to figure out monetization for this segment. For context, ads are displayed to users in only 29 countries even though it has users in more countries than that. But its strategy is to get users first before working with brands to start advertising. For example, it just launched ads in Brazil in April. And it's launching ads in Mexico this month.
If current trends continue, Pinterest's international revenue could soon be a far greater part of this business than it is today. Indeed, in the first quarter of 2020, international revenue was just 13% of its total revenue compared to almost 20% now. It's a developing story that many investors are overlooking.
For me, I bought Pinterest stock believing it would grow its user base and increase its user monetization. If you look at just the U.S., this story looks like it's slowing down. But this thesis is just starting to play out internationally, and it's why I'm so optimistic for the long term as a shareholder.
I'm also excited thinking about past winning stocks. Sometimes these are overlooked because the thesis was playing out under the surface. I'm reminded of Roku. For a time, the stock underperformed because the market saw it as a hardware play, failing to recognize the growing ad revenue on its platform. I'm also reminded of Square. This stock was once an underachiever as well. The market was looking at just the established Seller ecosystem and overlooking the nascent Cash App ecosystem that's now driving the company's growth.
The same seems true of Pinterest with its international segment, giving investors today an entry point into an overlooked opportunity.