Pinterest Stock Has Been Hammered. Is It Still a Buy?

Pinterest (PINS -0.52%) stock has taken a beating lately and is now trading at more than 30% off its high from earlier this calendar year. The visual search and ideas social platform took off during the coronavirus as it benefited from people being cooped up at home. But what should investors think now? On a Fool Live episode recorded on May 12, Fool.com contributors Brian Feroldi, Brian Withers, and Matthew Frankel discuss the company's latest results and whether this stock is a buy at the current price.

Matthew Frankel: But Pinterest took a nosedive recently and their earnings report didn't help. There were some scary things in their earnings report that investors didn't really want to see. But first, let me just go over the headline numbers.

Pinterest beat expectations on both revenue and earnings in the quarter. The revenue was up 78% year over year. That includes 170% growth in international revenue. Adjusted earnings were positive, they're profitable, also beat expectations. Why would a stock go down like that? They're expecting revenue growth to accelerate in the second quarter to 105% year over year. The scary thing is, and I'm going to do a Brian Feroldi and share my screen real quick because I brought visual aids this time.

Brian Feroldi: He's learning.

Frankel: This is revenue. How could anyone be upset about this? Well, go down here. This is Pinterest's monthly active users. Notice the red on the bottom. This is what really scared people a lot. It's been stuck at 98 million for the past three quarters. It grew 9% year over year. That scared investors, and management also said they are expecting this to actually decline a little bit in the second quarter. As things reopen, I just mentioned that the reopening is progressing a lot faster than expected. Management's actually expecting this to decline to about 96 million at the end of the second quarter in U.S. users. Don't be too scared about that.

International growth is still phenomenal. As you see, that's the bulk of the user base, 380 million versus 98 million. The international user base still grew 37% year over year. Here's why people care so much more about the U.S. users. They at the moment generate a big disproportionate share of the company's monetization. The average U.S. user brought in $3.99 in the first quarter compared to just $0.26 for an international user. That means the average international user is worth 7% of the average U.S. user to Pinterest in terms of revenue. But that's for now.

Look at the revenue growth year over year, 91% growth in international user monetization per user year over year. These number -- the gap will narrow considerably. I don't think it'll ever actually fill. You're never actually going to see Pinterest international users earning as much for the company as U.S. users. We've seen this in the more mature tech plays. There's Facebook's, for example, active users pretty much stagnant in the U.S., still growing internationally. If you look at their average U.S. user, generated $48 in revenue per user in the first quarter, over 10 times what Pinterest did. But if you look at, Europe was about 1/3 of that, Asia was about 1/10 of the average U.S. user, the rest of the world was even less.

It's to be expected, even as these mature, that the international users aren't going to be generating quite as much, but there's a lot of room to narrow the gap. Like I said, that's about 80% of Pinterest user base. That's one reason I'm really bullish on Pinterest still, the stock is down 37% from its highs.

The CEO essentially told investors to pump the brakes on their expectations when it comes to user growth. The quote was in mid-March, "the easing of pandemic restrictions slowed monthly active user growth and lowered engagement year over year as people spent less time online." I know at this time last year, I was locked in my house spending time online. [laughs]

[Today] I was working outside until we came in here to record the show. Now, I would be out somewhere doing something working in my office or something like that right now. People are getting out more. People don't have as much time to browse on Pinterest anymore. People are working. Unemployment is very dramatically lower than it was a year ago.

We're just seeing the reopening catch up to Pinterest in a way. I have no plans to sell. I actually added not that long ago before the recent earnings report. I bought a bunch in March, so I'm still up from where I bought it. I had the foresight or luck. We'll call it the foresight. But I had the luck to buy a bunch of shares in March at about $14. I added to it at much higher than it's trading right now. I still think it's a very good value. I think Pinterest has 10x potential from the current price level as they build out their international base and really figure out how to optimize monetization a little bit more. But I know you guys own Pinterest. What are your thoughts on the recent developments?

Feroldi: I agree with everything you just said. The only other thing I'll say is that if you've studied Netflix at all, Netflix provides wonderful charts on their subscriber growth. How did Netflix do this past quarter? They missed their target. Why? Because all of the growth they would have had got pulled forward to 2020.

I view Pinterest user growth as the exact same thing. They're going up against really tough comps. But most importantly to me, the thesis for me to own Pinterest wasn't user growth in the United States is going to go bananas. That's not the thesis. The thesis is ARPU [average revenue per user] globally is going to go bananas because I think Pinterest is one of the most monetizable online platforms in the world. I put it basically second to Facebook.

It makes no sense to me that ARPU for Twitter and Snapchat are higher, many multiple times higher than Pinterest. Pinterest to me is a natural shopping platform. As long as ARPU continues to move higher and the company continues to roll out new features, that's what I'm focused on.

Frankel: Facebook, I'd mentioned they generated $48 per U.S. user in the latest quarter. Pinterest was just under four. It's fair to say that you think that gap could narrow considerably over time.

Feroldi: I don't think Facebook's done, either.

Frankel: I'd agree with that, too.

Feroldi: So yes, I think the gap will narrow significantly. The gap for international will narrow significantly. I think that Facebook is still going to grow. We're still pretty early. We're still early in the rise of digital advertising and buying things online and Pinterest plays beautifully into that trend. They also play nicely into the maker trend. If you're a fan of Etsy, Pinterest is a major traffic source for Etsy.

Frankel: Yeah, I could see them building out relationships with all these major e-commerce platforms.

Feroldi: They already have them.

Frankel: They do. They've Shopify, is a big partnership. Just to name one. I think you're right. The social media industry in general is still in the early stages of monetization. Not so much Facebook anymore, but I don't think they're done yet. Remember when Facebook went public and no one thought that was a monetizable platform, that users aren't going to put up with ads, everyone is going to leave the platform as soon as there's ads. They have 3 billion users. That didn't happen.

Feroldi: And growing. [laughs]

Frankel: And growing.

Brian Withers: Just amazing.

Frankel: I'm still very bullish on Pinterest. I am looking forward to adding as soon as I can shut up about it for a couple of days so I can add to it.