The honeymoon is over for Pinterest (PINS 5.92%).
The virtual pin board has been one of the market's biggest darlings during the pandemic with shares climbing approximately 800% from trough to peak, but its second-quarter report served notice that the company is taking a breather from its upward surge.
Pinterest shocked investors by reporting a decline in monthly active users in the U.S., where the vast majority of its revenue comes from. Domestic MAUs fell 5% year over year from 96 million to 91 million. And on a sequential basis, the decline was even worse, down 7% from 98 million in the first quarter.
Management acknowledged it was surprised by that decline, as well as by a slowdown in growth globally as total users rose 9% to 454 million. It cited the impact of people spending less time at home as pandemic-related concerns in many places eased, allowing them to return to social activities that took focus away from core Pinterest use cases like home decor, gardening, and cooking.
Investors responded by pushing the stock price down 18%.
Yet while this user decline may look like a red flag for the company, it's not as big of a problem as it seems.
All users are not created equal
The company defines a monthly active user as anyone who opens Pinterest on a mobile app or website at least once in a 30-day period. In other words, there's a wide range in the value of those users to the platform. Some come to the site every day for inspiration or to create. Others may only look at Pinterest occasionally when they need ideas for something like a Halloween costume. During the lockdown period, the platform likely attracted some new users who might have only come to it once or twice. They were curious about Pinterest and bored during the pandemic but weren't apt to become regular users.
Management said as much in the report, noting the MAUs it lost tended to be lower-value users. In the shareholder letter, the company said, "Virtually all of the difference between our Q2 MAU guidance and our actual Q2 MAUs is attributable to a decline in MAUs who use Pinterest on the web. These users have tended to be less engaged and generate less revenue than Pinners who visited our mobile apps directly."
MAUs on mobile apps, which are more valuable, increased year over year in the U.S. and were up by more than 20% internationally. The number of domestic MAUs under 25 also rose by a double-digit percentage, another positive sign as that demographic tends to be desirable for advertisers.
Investors should also remember that seasonality in engagement is normal for Pinterest, and the second quarter is typically its weakest for engagement and user growth, likely due to warmer weather.
Monetization remains strong
In spite of declining user numbers in its core market, Pinterest posted blowout revenue growth, with its top line up 125% to $613.2 million, easily beating analysts' estimates. If this business is in trouble, somebody forgot to tell the revenue line.
Average revenue per user in the U.S. more than doubled from $2.50 to $5.08, and internationally, that metric increased from $0.14 to $0.36. That growth has been driven by new products like Story Pins, the introduction of automatic bidding for advertisers, and an increase in its advertiser base, including growth among large retailers.
Compared to larger social media peers, this company still has a lot of room for ARPU growth, and its platform is attractive to advertisers because Pinterest's users want to see ads. Many of them come to the site with purchase intent for things like clothing or home goods.
Additionally, profitability has surged. In the quarter, the company reported adjusted EBITDA of $178.2 million, or a 29% margin, and GAAP net income of $69.4 million. At scale, this will be a very profitable business, much like Facebook is today.
User growth volatility is normal
Virtually every social media platform has dealt with user growth concerns at one time or another. Some have refined how they report user growth. Twitter once used monthly users as its key metric. Now, it focuses on monetizable daily users. Snap experienced a decline in users after it redesigned its app in 2018, but it just posted its fastest user growth in four years, and the stock has been a huge winner.
It makes sense Pinterest would be experiencing some audience-related headwinds as the U.S. economy reopens. Netflix similarly reported a sequential decline of 400,000 subscribers in North America in its second quarter, also its seasonally slowest time of year, another reflection of Americans returning to their normal social activities.
Like Twitter, Pinterest may want to adjust its reporting metrics to better reflect the performance of the business, as there's a broad range in the value and engagement of its MAUs.
Management did note the trend continued in July with U.S. MAUs down 7% year over year, but Pinterest also forecast revenue growth in the low-40% range in the third quarter, indicating the underlying business continues to grow briskly.
Last quarter's MAU decline looks like a temporary headwind from the reopening, not a fundamental crack in the business. A year from now, Pinterest will likely have returned to a more normal user growth rate, its financial numbers will be even greater, and the product will have improved.
Long-term investors may want to take advantage of this sell-off as a buying opportunity.