Is Pinterest Stock a Buy?

Pinterest (PINS -1.55%) posted its second-quarter earnings on July 29. The social media company's revenue jumped 125% year-over-year to $613.2 million, reflecting an easy comparison to the pandemic's initial impact on its ad business a year ago, and beat analysts' estimates by $51.1 million.

Pinterest generated a GAAP net profit of $69.4 million, compared to a net loss of $100.7 million a year ago. On a non-GAAP basis, it generated a net profit of $169.9 million, compared to a loss of $38.4 million a year earlier. Its non-GAAP earnings of $0.25 per share topped expectations by $0.12.

For the third quarter, Pinterest expects its revenue to grow in the "low 40% range" year-over-year, which matches analysts' expectations for 43% growth. Those headline numbers all looked healthy, yet Pinterest's stock plummeted after it released the report. Let's take a look at why investors dumped Pinterest, why they may have overreacted, and if the stock is still worth buying.

Image source: Pinterest.

Why did investors abandon Pinterest?

The biggest problem in Pinterest's second-quarter report was its MAU (monthly active user) growth. Its global MAUs rose just 9% year-over-year to 454 million, missing its own forecast for "mid-teens" growth. That figure also declined 5% quarter-over-quarter.

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

Pinterest's MAUs in the U.S. declined both sequentially and year-over-year, while its international MAUs fell sequentially but increased year-over-year.

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

These numbers indicate users flocked to Pinterest during the pandemic to find stay-at-home ideas like recipes, home decorations, and children's projects -- but gradually left as vaccination rates rose, more businesses reopened, and governments relaxed their lockdown restrictions.

Pinterest expects that slowdown to persist in the third quarter. It noted that as of July 27, its U.S. MAUs had declined "approximately 7% and global MAUs have grown approximately 5% year-over-year." 

Why Pinterest's investors might have overreacted

Pinterest's slower MAU growth was disappointing, but its revenue and earnings growth still easily beat Wall Street's expectations as its ARPU (average revenue per user) growth accelerated.

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

Pinterest benefited from an easy comparison to the prior year quarter, but its ARPU also grew quarter-over-quarter in the U.S. and overseas. That growth suggests it's aggressively monetizing its users.

Pinterest primarily lost desktop users, who generally spend less time on the platform, but partly offset that loss by gaining more mobile users. Pinterest's mobile MAUs in the U.S. actually grew year-over-year during the second quarter, while its international mobile MAUs rose more than 20%.

Pinterest's core audience consisted of older female users at the time of its IPO two years ago, but it's been gaining ground with younger Gen Z users. During the second quarter, its U.S. MAUs under the age of 25 rose by double-digit percentages year-over-year. It attributes a lot of that growth to its new Idea Pins -- which provide ideas and tutorials for various topics.

Companies also continue to upload their catalogs to Pinterest as shoppable pins, which widens its moat against Facebook's (META -4.13%) Instagram and Snap's (SNAP -4.04%) Snapchat in the nascent social shopping market. Its catalog uploads rose nearly 50% quarter-over-quarter, and its integration with Shopify (SHOP 0.23%) and other e-commerce services could continue to blur the lines between its social and shopping features.

Lastly, Pinterest's adjusted EBITDA margin of 29% marked a major improvement from its comparable margins of 17% in the first quarter and negative 12% in the year-ago quarter. That ongoing expansion, along with its stabilizing GAAP profits, indicates its growth is sustainable.

Is it the right time to buy Pinterest?

Pinterest's stock was trading at 55 times forward earnings before it posted its second-quarter earnings. It tumbled roughly 20% after that report, but it still can't be considered a bargain yet.

That said, I believe investors overreacted to Pinterest's slower MAU growth. It's still gaining mobile and Gen Z MAUs, it's monetizing them more effectively, and it continues to evolve into a social shopping platform. Pinterest could face tougher post-pandemic comparisons over the next few quarters, but this promising stock still has plenty of upside potential.