Pinterest (NYSE:PINS) reported second-quarter results on Thursday, July 29, that disappointed investors. As a result, the stock crashed over 13% following the announcement. Although the company reported better-than-expected revenue and earnings per share, it reported lower-than-estimated monthly active users (MAU), and that's what sent shares crashing down. 

That's leaving some shareholders questioning if the crash in Pinterest's stock price was justified or if the selling was overdone. Let's take a closer look at the quarters' results and try to determine if the drop in Pinterest's stock price was the former or the latter. 

Three teenagers looking at their mobile devices.

Image source: Getty Images.

Reopening economies is having a negative effect  

Pinterest reported revenue growth of 125% in Q2. Meanwhile, analysts were expecting it to report 106.5%, and Pinterest's own guidance estimated revenue growth of 105%. Revenue growth was fueled by large businesses ramping up their spending on the platform to get the word out as economies reopen. 

Interestingly, reopening is having an overall negative effect on Pinterest. As folks are spending more time away from home, they are spending less time engaging with Pinterest. The trend led to a decline in monthly active users from the previous quarter, both from the U.S. and internationally. In the U.S., where the average revenue per user is more than 10 times higher than international users, MAU declined by 7 million from the first quarter to Q2.

Similarly, MAU from outside the U.S. declined by 17 million from Q1 to Q2. So, while reopening economies is getting advertisers to ramp up spending on Pinterest, it is causing the company to shed MAU -- a concerning trend from a company that was regularly growing MAU. The reversal spooked investors and is likely to blame for the major sell-off that followed the announcement.

Was the sell-off in Pinterest's stock price justified? 

The loss of 24 million MAU is a tough pill to swallow. Consider that as of its most recent report, Pinterest has a total of 454 million, and you will see it lost over 5% of its user base. Advertisers pay for access to individuals. The fewer people you have on your platform, the less advertisers will spend on your site. And the effect of losing MAU will last longer than the benefit of outperformance in revenue for one quarter.

Looking at the effect of MAU loss from the U.S. alone, you can start to estimate the annual cost to Pinterest. Over the previous four quarters in total, Pinterest generated an average revenue per user of $18.86. If you multiply that total by the 7 million MAU it lost from the U.S., you get an annual decrease of an estimated $132 million in revenue.

That's not even accounting for the growth rate in ARPU from fiscal 2020 to 2021. Applying that figure, the cost to revenue would be an estimated $203 million annually. To put those figures into more context, Pinterest earned $1.7 billion in revenue in all of 2020. Those losses are substantial on their own, but what is making matters worse is that investors are unsure if the MAU losses will stop this quarter.

Uncoincidentally, the $203 million in estimated annual revenue loss is about 12% of annual revenue and is roughly the same as the 13% sell-off in the stock price following the report.

Conducting some calculations on the effects of MAU losses shows a valid reason for Pinterest's stock price to fall off. The good news for shareholders is that these users still have Pinterest accounts. They just haven't engaged with them in the last month. There is a possibility that they will reengage with the app in the next few quarters as the weather cools down and the initial pent-up demand for outdoor activities recedes.  

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.