What's Going on With Pinterest, Upwork, and Microsoft?

In this episode of Industry Focus: Tech, host Dylan Lewis and Motley Fool contributor Brian Feroldi explore the numbers behind Pinterest's (PINS 0.89%) 20% dip after earnings, how Upwork (UPWK 1.25%) is finding accelerating growth, and why Microsoft (MSFT 1.65%) could become the world's largest company some day.

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This video was recorded on July 30, 2021.

Dylan Lewis: It's Friday, July 30th, and we are going to be checking in on earnings from some tech stocks. I'm the host Dylan Lewis, and I'm joined by fool.com's subpar sultan of stratospheric SaaS stocks, Brian Feroldi. Brian, how are you doing?

Brian Feroldi: Dylan, happy Friday to you. We are in the midst of earnings season, so we literally had a bazillion choices here. We decided to share with the good people a little for Motley Fool Money, so we didn't overlap.

Lewis: That's right. We try to maintain a nice coherent content experience here at The Fool, checked in with Chris Hill. They're going to be doing a lot of big tech earnings. If you're looking for the breakdowns on Facebook, Alphabet, Apple, Shopify, they've got you covered. We're going to be talking about a couple names that aren't making their list of episodes for MarketFoolery and Motley Fool Money this week. In this case, we're going to be talking about Pinterest, we're going to be talking about Upwork, we'll be talking about Microsoft. We snuck one of those big tech names in there, Brian, because we felt like we had to a little bit.

Feroldi: On the off chance you only listen to the Friday edition of Industry Focus: Tech and you only listen to Motley Fool Money, we will give you one big tech stock.

Lewis: There you go. It's too relevant. It's too important in the grand scheme of the economy for us not to be talking about at least one of those names. But we'll start out talking about Pinterest. This is a name that I think a lot of Fools follow. It is one that's in my portfolio and it's one in yours. Brian, it belongs in my portfolio in part because you were pounding the table so hard on this company for such a long time. Folks that listened earlier are definitely pretty happy with the results. The company has been putting up pretty solid quarterly numbers.

Feroldi: Yet, again, we saw a fantastic earnings report when looking backwards. However, Pinterest stock at the time of this taping, not having a good day, so something clearly went wrong. But the headline numbers for this company were fantastic. Revenue grew 125% to $613 million. Not only was that way above management's guidance, it also blew past Wall Street's estimate of $562 million. If you look at where the revenue came from, the United States continues to be the dominant growth driver or the driver of total revenue. Revenue in the U.S. grew 65%. International revenue, which to me is the most exciting growth story for this company, grew 170%. We've seen this company making a lot of investments to grow its international business, and those investments are already paying off. Top-line growth is huge, and on the bottom line, the bottom-line number here is also impressive. Adjusted earnings were $169 million, that's $0.25 per share. Wall Street was only expecting $0.13, so the headline numbers for this company look great.

Lewis: Yeah. I want to just click into some of that geography-based revenue look that you gave. The dynamic is always interesting with these ad-based businesses because North America and the United States always punches a little bit higher than the rest of the world, simply because ad rates are going to be higher in those markets, so you really need a much larger international business in terms of users for it to turn into anything that even matches what happens in North America in terms of revenue. We see that when we look at the ARPU numbers for this business. But even though, U.S. is going to be the driver and the ad rates are generally going to be the best there, you always want to see expansion, you always want to see growing TAM because it just creates more marketable opportunities for the business.

Feroldi: Yeah, and for those that might be confused by that term ARPU, that's average revenue per user, essentially, how much revenue does a company generate for each of its users. If you look at the breakdown, there are two different worlds in terms of scale. In the United States, the average Pinterest user generates over $5 in revenue for the company. That figure doubled year-over-year to over $5. Internationally, again, where they're still just getting ramped up, that figure grew to $0.36. That figure was up 163%. It just shows you that a user in the United States it's literally 15 times more than a user in international markets from a revenue perspective. I think over time those two numbers will converge on each other, but it just shows you how much revenue comes from the U.S.

Lewis: It's incredible for me to see that triple-digit growth just given in some ways how mature this company is. I know they're early on in their monetization efforts in a lot of ways for how long the company has been around. But for ARPU to be going up and to the right and for it to be going up triple-digits, what that means generally is you're seeing more inventory available within the user experience and advertisers are seeing really strong ROI on their ad spend and the rates that people are paying for those ad spots are going up over time.

Feroldi: That's exactly the story that we're seeing. Again, the headline numbers, the financial numbers looking backwards for Pinterest were great, there's no other word for it. However, the part that Wall Street is really not happy about is the monthly average user numbers. Globally, the company's monthly average users grew 9% to 454 million. That sounds great. However, when you dig into the details, there's reasons to be a little bit cautious here. In the United States, the number of monthly active users declined by 5% to 91 million. While internationally, they grew 13%, that was year-over-year. If you actually look at the quarter-over-quarter numbers, they've declined in both geographies. International monthly average users declined from 380 million last quarter to 363 million this quarter. In the U.S, it was even bigger, 98 million last quarter to 91 million this quarter, that has some people on Wall Street spooked.

Lewis: Yes. It makes sense. Users are the lifeblood of a social media company. I know you can debate whether Pinterest is social media or it's visual discovery, if it's an e-commerce adjacent, but people on platform is really what's going to drive activity. It's what's going to drive monetizable units in terms of ads, all that kind of stuff. Any interruptions to the thesis of growing users over time, it's going to hit pause. In the case of Pinterest today, we're seeing almost a 20% sell-off at the stock, so it's a very sharp reaction. But Brian, when I look at this, to some extent, I think it's just us reminding ourselves that there is seasonality with some of these businesses and people are going back out into the world a little bit more than they have. I know there's a lot going on with the different variants right now with COVID, but a lot of the businesses that have been huge beneficiaries of COVID are seeing a little bit of stalling like you would typically see during the summer in any year except for 2020.

Feroldi: Especially when you consider just the nature of what Pinterest business is. To your point, it's not a social network. It is in some ways, but in many ways it's not other. Pinterest isn't a site that everybody goes to every day to see photos of their friends or to see what's trending. It's a place that you go to when you need inspiration. Because of that, I understand why the quarter-over-quarter numbers don't look all that great. In the year-ago period, everyone was trapped at home. Everyone had nothing to do except to spend time in their house and on their house. That flows naturally into pulling forward a lot of demand for Pinterest. Now that stay-at-home is easing and people are out in the world, I understand why the number of people who are going to the Pinterest site has declined. But if you double-click a little bit more into the numbers, I think there's reason for some optimism. First off, management said that web users were the least engaged. In fact, mobile users or people that are using Pinterest on their mobile phone, they remain highly active. Monthly active users of their mobile app actually grew 20% year over year. Management said that the entire Delta for the monthly average user shortfall was based on web browsers which aren't as loyal. The other thing to note is Generation Z, so its youngest audience, is still growing at a double-digit rate. I think it has more to do with the timing of these numbers than anything else, but make no mistake. This will be the story for investors to watch moving forward.

Lewis: Yeah. I think this is one of those stories that is both when you look backwards on the immediate results, a little troubling and with what the company guided for, also somewhat troubling. We aren't necessarily looking at one quarter of them being pinched in this U.S. market, they're showing, hey, this is probably something that we're going to be seeing both in the quarter that we just reported and in the subsequent quarter that we're in right now.

Feroldi: For the upcoming quarter, management said that quarter-to-date and again, there's only a few weeks' worth of data here, but they said that quarter to date, so for Q3, monthly average users in the U.S. were down 7% year over year. In the international markets, which are getting bigger from a per-user base, they are up 5%. We might be seeing some more normalization there. As a result, given what's happening with the member numbers, management is guiding for 40% revenue growth in the upcoming quarter. Keep in mind, this company just reported 125% revenue growth. While they might be being conservative, I understand why you, if you were in the stock for the short term, you're not feeling great today.

Lewis: Yes. I remember at one point I think we talked about Pinterest on the show. I said, the dumb simple way to explain the thesis for this company is their ARPU is about $5. Facebook's is, I think it's about eight to 10 times that. That's the growth opportunity for them. Even if they don't really have a dramatic rise in the number of users on the platform, if they are able to keep the critical mass that they have and find ways to better monetize it. There's just incredible growth in front of them, Brian. I don't know that I've seen anything that interrupts that part of the thesis.

Feroldi: Yes, I'm right there with you. In fact, management did say that while overall monthly average users and engagement were down, they said that shopping on their platform continues to be very high and far more resilient than the overall business. They also said that search traffic is actually elevated more than it was in the pre pandemic levels. Company also said that the recent partnership with Shopify is really paying off. They're seeing benefits there and in the upcoming quarter, they're going to be rolling out those futures with BlueCommerce, which is a Shopify-like service, not nearly the size and scale, but another one. The company is still investing heavily in making Pinterest a shopping platform. As investors, that's something that should excite us because that will lead to revenue. To your point, this company's average revenue per user globally last quarter was $1.32. Facebook last quarter, it was over $10. Even today, this company is still one ninth the ARPU of Facebook. Is there room between those two numbers? I think the answer is yes.

Lewis: Yeah. I think even if you're applying a heavy discount and saying that they get to half of what Facebook has, that still means they've got what, two and half, 3x in front of them. There's a good amount there, and I think it's worth taking a step back, one of the mistakes I made, we've talked about Snap on the show recently. We basically looked at them when they first came public and had a lot of questions, a lot of concerns, I don't dismiss them and they were a business that ran through user issues at points. They had some ugly quarters with what they reported, quarter to quarter and year over year. That company has only gone on to 10x since we reported some of those concerns. I think that there can be stumbling blocks along the way with users. It's just a matter of whether this is a couple of quarter issues or are we seeing people leave the platform? I tend to think it's seasonality just given everything else is happening right now in the world.

Feroldi: That will be my guess, too. But again, that's something we're not going to know based on what we're seeing today. I'm reminded of Netflix. The year-ago period, Netflix reported enormous growth in years. The most recent quarter, their growth in total subscribers was down substantially. It's basically pulling forward demand that should happen in this quarter. I think we're seeing similar dynamics with Pinterest, but again, that's something we won't know until we see a couple more quarters of earnings.

Lewis: I think that's 100%. As someone who is sitting on Pinterest shares and some of my positions are down since I bought them, I'm sitting in the red, I look at this and say this is the reason to buy into stocks over time. Yes. [laughs] We're talking about it today. Foolish rules will preclude me from doing anything. But I do think I'll probably be adding to the position at some point in the next couple of weeks. Just knowing that the ARPU thesis is still there. People like this platform. There's nothing that's interrupting that part of it. We're just seeing some lumpiness in the business as a result of what's going on with the pandemic and some of the reopening efforts.

Feroldi: I think that's fair. One thing that management did point out on the earnings call is they are experimenting with this thing called Idea Pins, which are short-form videos that they're saying are very popular with their users. They believe as they invest in this and roll them out, it won't lead to immediate revenue growth, but it should help to increase engagement. If you believe this management team knows what it's doing, you have to trust that they will eventually get the MAU number back, heading in the right direction.

Lewis: That's right. The second company we're talking about also ran into some issues of seasonality though not as pronounced maybe as Pinterest and that is Upwork. For folks that are unfamiliar, the Pepsi to Fiverr's Coke or perhaps, depending on your perspective, the Coke to Fiverr's Pepsi. It depends on whether you're looking at share price appreciation or revenue, I guess. But this is a freelancer platform with high use in the enterprise market. In particular, the ticker there is UPWK. A lot of folks are familiar with this one, we use it here at the Fool plenty. No surprise, Brian this is one of those businesses that has done incredibly well during the pandemic. Got a shot in the arm because of the pandemic and then moved to digital. A lot of businesses need to stand up web efforts, needing copy for their websites, needing SEO help, getting social media help. That's where they're able to plug in pretty well. What we saw for the most recent quarter, impressive numbers. Gross services volume increased 50% year over year to $876 million. Revenue was up slightly less than that 42% year over year. A reminder that revenue grew 24% year over year for fiscal year 2020. We're seeing acceleration with this business, which is encouraging, Brian, because I mentioned that Fiverr dynamic before and I think one of the things that we have long wondered about Upwork is: "You are the bigger company, you're in this space, and it seems like you've got a foothold in the enterprise market. Why is this other company eating your lunch when it comes to growth?"

Feroldi: Yes, that was our big question mark all along. We could summarize the answer, but we didn't know that because Fiverr came public after Upwork did. I remember when you and I did the S-1 breakdown on Upwork, we were both like, "There's a lot to like about this business and man is it on theme with where the world is heading, so why isn't it growing faster?" They did have a management change in the last 18 months, and it's possible that that would be the problem. But when I see 50% gross service volume growth, 42% revenue growth, and an acceleration there, that tells me that this growth story is back on track.

Lewis: I think that's right, and you can find the competitive dynamics just looking at the income statement, it bounces off the page. The company is still losing money, and it lagged the loss of about $16.5 million for the quarter. The reason for that, Brian, in large part, was the SG&A spend. It was up 52% year over year. It grew faster than revenue growth and climbed to 63% of revenue, which is the highest amount I have seen in the time that I've followed this company. I think a big part of that is they are in the greenfield area. They are trying to acquire as many customers, and bring as many businesses online as they possibly can. Because I think in large part the competition is heated up from Fiverr.

Feroldi: That's something that they really have to do. Because Fiverr was growing so much faster than they were, and really nibbling at the bottom end. We've seen Fiverr starting to move upmarket and become even more of a direct competitor. It's not great when you have to see a company essentially spend like crazy to maintain what should be a leadership position but I think that's the right move.

Lewis: I think it is, too. I mean, if you're thinking gig economy, freelance, distributed networks of employees, and contributors we're in probably inning one of that story. We're really early on and so getting people on the platform is going to be huge. They've added some offerings that I think help them better compete in this space. One of them being this project catalog product. This is something that they launched in late 2020. Basically, it allows for pre-scoped projects to be offered in the way that you would almost be buying something on an e-commerce website. The projects are scoped out ahead of time, it's available for instant purchase. What I think is helpful about this is it removes friction for potential buyers, and it provides a menu for people that are operating in different spaces as to what they might need. They don't have to invent the project for someone to fill it's there for them. I think it's a very compelling offering if you're in the freelance space, and you work with a lot of entrepreneurs that know that they need to do X, Brian, but maybe don't even have the language to know specifically what that means.

Feroldi: I think that is a great move because when it comes to using websites like this, it's easy to get overwhelmed. Even if you're a business, businesses like things to be easy, they don't want to have to go around and reinvent the wheel. The more of that Upwork can do to make its platform simple to use for both enterprises and for the freelancer themselves, the better it will be for engagement.

Lewis: Yeah, you want to remove the number of decisions that people have to make and make it as simple as possible for them to use the platform. It seems like the project catalog is helping people do that. It's really just trying to reduce the decisions and it creates another way for people to engage with Upwork. In the most recent quarter, that specific product was responsible for 10% of the new customers they brought in. They are looking at this as something that can help them bring in new customers, but then also create cross-sell opportunities on the platform, which I think is compelling. You're bundling these things together and I think as you identify a specific use case for a client, other ones will emerge. We're seeing pretty strong stuff on the client side for this business, core clients up over 20%. Year-over-year those are some of their bigger clients and client spend within those big clients is up 114%. Previous quarters have been 106%, 102%, and 100%. That number is moving in the right direction and I think one that we're happy to see, but I think what's interesting is we're not going to be seeing those metrics going forward. I'm never quite sure what to make of that Brian, when a company has a number that looks like it's improving and they stop reporting it.

Feroldi: When a management team has been reporting a metric since day one and they all of a sudden say we're not going to be reporting this any longer, that tells me that they think that metric is about to head in the wrong direction. I hate it when companies all of a sudden pull back on investor information. They better have a really, really good reason for doing so. That move by them definitely irks me.

Lewis: Yes, it's not great. We're always going to want more and more information. Transparency is helpful for us in figuring things out, not to imply anything malicious here. We'd just like as good of a lens into a business as we can possibly get. I will die on the hill that Apple should be providing us the ASP and the number of units for their iPhone sales. But Tim Cook doesn't seem to listen to me. There we are, Brian. They're doing some other stuff on the platform that's interesting, too. They launched in Q2, this talent scout offering. Basically helps businesses with hands-on recruiting and it sidesteps the traditional staffing agency. What I see here is a lot of efforts to solidify what they're offering on the enterprise side, I think is part of insulating themselves from some of the competitive pressure from Fiverr. Because like you said before, Fiverr is moving upmarket, and you're probably only going to have one freelancer solution at any given company, at least for the enterprise side.

Feroldi: Yes, I think that's fair. But to your point, I know we've said this multiple times, both Fiverr and Upwork are competing and taking share in such a massive market that both of these companies have mega tailwinds behind this. I don't think it's going to be one winner to rule them all. I think there's nothing wrong if you like both businesses, then just buy both.

Lewis: Yeah. I was going to say if in this you're like, "Oh, I don't know which one," buy them both and just forget about it. I think it's a totally valid tactic. I only own Upwork and have been kicking myself for not having bought Fiverr earlier. It is one of those stocks that's on my watch list and I will probably wind up nibbling at some point just because it's been such a great performer, and it's nice to have two horses in the race, so to speak. If you're looking for this business and somebody is similar to Pinterest with the story, just not as severe, management noted they are seeing some summer seasonality in their business. Typically, they'd see a little bit of a reduced activity in the summer. Once they didn't see that in 2020, now they are bumping up against those comps in 2021. They're guiding for 30% year-over-year growth in Q3 and they upped their full-year guidance to about $490-$494 million in revenue, which would be just over a 30% year over year growth, an acceleration for them. I think a lot of the things that put them in that position are going to stick around. The existential question for this business and for Fiverr, Brian, is, what does reopening and a sustained reopening one that we don't have to go back to a shelter-in-place or a quarantine type situation mean for a business like this and does all the activity we've seen get pulled forward in 2020, stick around?

Feroldi: I am personally technically a freelancer myself, and I can't ever see myself going back to the old way of doing things. I know a whole bunch of people that were forced to work at home, and companies like Fiverr and Upwork allow them to continue to do so. While there might be short-term bumps in the road due to people going back to the office, I think that both of these companies have a bright future ahead.

Lewis: Yeah. I think it's a trend that would be silly to bet against. Too many people enjoy it and the benefits are there both for the customer side and the provider side. I mean, people love the flexibility. People have been able to make their hours and for businesses, it's really helpful to be able to get consulting or actual work done for you without having to hire that person on full-time if you're just trying to scale something up in your relatively small operations. I'm 100% with you. Brian, our final company here. Everyone owns this stock. I think we can frame it that way. I talked about two companies that maybe people don't have in their portfolio. If you own an index fund, you own Microsoft and you own a decent amount of Microsoft just because the S&P 500 is a market cap weighted index. This is a company that we always want to look at because it has been a great performer and is one of the largest ones in the economy.

Feroldi: Microsoft reported revenue growth of 21% to $46.2 billion. It is amazing to me. This company came public in the 1980s. It's up, I don't even know how many thousands of percent at this point and yet 40 years later, they're reporting over 20% revenue growth in the quarter, incredible. That figure was not only fantastic in absolute terms, it was almost $2 billion ahead of what Wall Street expected in the quarter. Gross margin increased by 200 basis points to 70%. Add those together with some share buybacks, and we saw earnings per share grow 49% to $2.17. That beat the consensus estimate by a quarter. It was a very strong number from the headline perspective.

Lewis: Yeah, Brian, I don't think if there's ever been a time in history, maybe I'm wrong, maybe like Bill Mann would hop in and be like, actually. But I don't think there's ever been a time in human history where companies this large have grown this fast.

Feroldi: It's really incredible. The FAANG stocks have been unbelievable performers, and when you see results like this, it's understandable why their businesses are just incredible and they are taking advantage of all the scale that comes with modern computing. The headline numbers for Microsoft were fantastic and if you dig into the results even more, the results just keep getting better. The commercial Cloud business now has $69 billion in annual revenue. That figure was up 34%. I love this stat from the company's business. We have three Microsoft franchises in the last few years that have all surpassed $10 billion annual revenue. Gaming, security, and LinkedIn. Remember LinkedIn? LinkedIn is doing great. Their revenue grew 46% in the most recent quarter, and I almost couldn't believe this. LinkedIn has 774 million members that are using it, 774 million. It's like the social network that we just forget because it lives inside just this massive company, so they are doing a really good job with that acquisition. $10 billion in annual revenue is incredible.

Lewis: I think a lot of people were wondering what was going to come of that because when you have something like LinkedIn, it's a consumer brand, something that a lot of people are familiar with. Getting gobbled up by a big company. It's wonderful that it's turned into a good revenue contributor for Microsoft. But if it hadn't, Brian, a company of Microsoft size could have written that off and it wouldn't have been a problem.

Feroldi: Microsoft has a history of doing just that, of taking billions of dollars, acquiring something, and then later just writing it completely off. It's good to see that that acquisition is paying off. Now, if we dig deeper into Microsoft's reporting segments, as a reminder, this company has three major reporting segments. The results across the board were good, although some segments are doing better than others. With the company's productivity and business processing segment, revenue there grew 25% to $14.7 billion. That includes things like Microsoft Office, which was up 20%, LinkedIn, which was up 46%, dynamic products, which is up 33%, and Microsoft Teams, which again is another what? This company's Teams has 250 million monthly active users, including 80 million members that are using the Teams' phone product, so Microsoft's business productivity tools are killing it.

Lewis: There's nothing not to like in that rundown in that report. Not only do you have an incredibly well-diversified business in some ways, Office, we know, is such a large part of the story and Cloud is a huge part of the story, too, and we'll get there in a second. But all of them fire on all cylinders.

Feroldi: Double-digit growth at this stage of the game is just incredibly impressive. So the company's Intelligent Cloud business, that revenue grew 30% to $17.4 billion. That's the company's largest segment now, and that includes server products and tools that grew 34%. Azure grew 51%. Again, the Cloud is the gift that's paying off for Microsoft. Now, if you look at the company's more personal computing, which includes things like Surface and Search and Xbox, revenue there only grew 9%, still good overall. One of the reasons is their Windows revenue that is still on the decline, which makes sense since many people are shifting so much to the cloud. But their Windows commercial products and Cloud revenue grew 20%, so the Windows business overall is still growing. Xbox revenue, which can be lumpy depending on seasonality and things, actually declined by 4%, and Surface revenue dropped by 20%. The reason for that, the company said, was due to supply shortages, so the chip shortage is hitting Microsoft in those departments. But how is this one? search advertising revenue on Microsoft? Yes, search advertising revenue grew 53%. Dylan, you remember Bing? It's still a thing.

Lewis: I'm waiting, Brian, for you to be like, "Restaurant revenue at Microsoft." It's just like they start throwing out the categories. They have their hands in everything. We got to a section where there are finally some numbers that maybe aren't quite as encouraging, but they are such a small part of the overall story that they almost don't even matter, especially when you have something that is like a Cloud segment that has grown tremendously, but is basically like what the next decade, two decades of tech, they're squarely one of the top three players there, and so you know that that's just going to be the gift that keeps on giving.

Feroldi: Given the numbers this company is reporting and given the megatrends that are behind it, if you are a Microsoft shareholder, you should feel nothing but smiles about this report and feel really good if the company is just going forward.

Lewis: Yeah. I think that's a good point, Brian, because it is easy when you see a company hit, in Microsoft's case, it's a $2.14 trillion valuation. When you see Apple hit two trillion a little while ago and you see Microsoft hit that number, it invites the question, "OK, well, how big can this thing really get?" When the growth rates are as strong as they are for a business like that, the answer is going to be bigger, the answer is just going to continue to be bigger because it deserves to be worth more as it posts those overall growth rates. I think if you're a shareholder, props to you, especially if you saw the cloud transformation that the company went through because you've been rewarded handsomely for that foresight, but if you're not directly a shareholder, you're still benefiting as long as you're on the S&P 500.

Feroldi: You sure are. Well, that is a very natural question I'll throw out there. But if I was to bet between Microsoft and Apple, I would have more confidence, possibly, in Microsoft continuing to grow at a double-digit rate than I would in Apple just given the nature of its business. But if you feel otherwise, that might be a fun bet that we could make.

Lewis: That's an interesting bet. To think about that for a second, Brian, Apple needs hardware for its software to flourish. The software and high-margin sales they make are dependent on them selling phones and computers, not the case for Microsoft. I think that gives Microsoft the long-term edge. The mitigating factor's Apple's so good at hardware that it insulates them a little bit. But the Microsoft Cloud segment is something that is hard for Apple to replicate even with services, it just doesn't sniff what the cloud potential could be. I think you're probably right.

Feroldi: OK, so you're not going to take me up on that?

Lewis: I know, but I wanted to reason through it a little bit before I decided yes or no. That's been a thought for a long time, they've jockeyed a little bit for position, Apple's generally been the leader. I would not be shocked if in two or three years, we're talking about Microsoft being the largest company in the world. Amazon might hop in there, too, it's hard to say.

Feroldi: I bet that Microsoft regains its title and currently it's about $300 billion smaller than Apple, but those two numbers bounce around anyway.

Lewis: What's $300 billion between time, Brian?

Feroldi: What's a PayPal valuation between tech titans?

Lewis: Before we wrap up today's show, because we're hitting so much earnings news, we very serendipitously got this question at [email protected] from one of our listeners and I want to hit it. From GKM, asking, "Can you discuss the various reasons for a stock sell-off after reporting good earnings? For example, Apple and Starbucks reported good earnings with their stocks trading lower today and a little bit earlier in the week." The day-to-day movements might not be captured there. But Brian, I think this is a great question because we've done shows so many times where we've said, wow, you look backwards and the results are just incredible. Then you see in the case of Pinterest, 20% decline. We talked a little bit in the case of Pinterest about why that might be happening, broaden this conversation out a little bit and talk about some of the different considerations that go into that.

Feroldi: That can be one of most confusing things, and one thing that I've heard Seth Jayson say and I fully agree with it, you could give me the earnings report ahead of time and I'm the only one that has it, I still couldn't predict which way the stock is going to go the next day. There's a bunch of reasons that stocks can report good earnings and the stock can decline. It's also worth asking what is the decline even for me? Sometimes I've seen plenty of cases where stock gets crushed in the after hour trading and market trading, and it actually closes the next day up. It really depends on what timeframe you're talking about. But I would say the No. 1 reason that that happens has to do with what happened with the stock before it reported earnings? If the stock was on an upward trajectory and it was going higher and higher and higher, and then it reported earnings and they were great, but they weren't great enough, sometimes stocks just get hit because their stock had appreciated too much. 

The other reason that stocks are hit very hard often is not so much about what did you just do? It's what are you about to do? In other words, Wall Street pays far more attention to what management says about forward guidance than it does to the absolute earnings and behind. As we just said, for Pinterest, 125% revenue growth, they almost doubled the estimate on the bottom line. That's fantastic. But the only thing that Wall Street cared about was monthly active users. They are hyper-focused on monthly active users and what's going to happen next. That's why I think Pinterest is getting smacked around. One of the things to keep in mind's what is happening with the overall market that day? Sometimes, the company can report great results and they just happen to report on a bad day for the market when everything's getting sold off, or maybe their competitor reported earnings the same time and it was slightly better, and they're getting sold off. This's a bazillion reasons why it can happen, but as Foolish investors, you should focus on the business and not so much the stock.

Lewis: Yeah. I think that that breakdown is great, Brian. The quarter that just happened versus the guidance is also helpful because that work reminds us that companies are, in a lot of ways, the reflection of future cash flows brought to present, and we have to remind ourselves of that, and even an amazing quarter is three months of that, and it already happened. When we start getting into what guidance looks like, we start getting into expectations, particularly for richly valued stocks, maybe a little bit less for the likes of Apple and Starbucks, any interruption to that growth story is going to cause an outsized impact in the stock. It's just the nature of it because so much of the valuation for those businesses is what will become not necessarily what they are right now.

Feroldi: I think that that's completely fair and, again, it can be so confusing to say, "This company just did great, shouldn't stock be up today?" But yeah, that could happen all the time. Previously, I was a shareholder of LinkedIn and I vividly remember one time when they reported earnings and that next day the stock fell like 45% or something like that. I mean, it was a stunning decline the next day. Jeff Lerner, the CEO, actually had to have an all-hands meeting with the company to say, this is fine, [laughs] we're still in great shape. If you bought after that marriage decline, you may do it well because Microsoft bought them out at above where the stock had declined. I always try and keep things like that in mind because I've seen fantastic long-term investments like Netflix, like Apple, like Amazon, just get punished brutally the day after they report great earnings. But if you believe in the company and the thesis is in the long term, that's what really matters.

Lewis: Yes, and to your point about the run-up, Brian, if you're using that on a company like Pinterest so down a little over 20% this week, which is tough to stomach if you're a recent shareholder, that's basically back where they were in mid-May. They're basically flat from the bottoms of mid-May, so the company went on a pretty stellar run in a really short period of time and we have to remind ourselves that seeing a stock increase about 40% in two months. It feels great if you're a shareholder, it's not necessarily the way that share price depreciation or company growth always happens. It tends to happen slowly and success doesn't look like a line that's consistently up into the right.

Feroldi: That's right, and one thing that I take part in and as a Pinterest shareholder, Pinterest the business today is worth $37 billion, Facebook the business is over $1 trillion, in other words more than 30 times bigger. Again, is there room between those two numbers for Pinterest to appreciate? I think the answer is yes.

Lewis: I do too, Brian, and that's why it's sitting in my portfolio. I might be adding a little bit more later in August, we'll see.

Feroldi: We will see.

Lewis: Brian, it's always nice to commiserate [laughs] when stocks are down a little bit. But it's fun to go through earnings and like I said, folks, if you're looking for some discussion on big tech head over to the MarketFoolery feed or the Motley Fool Money feed, folks over there have you covered. We all have them this time, Brian, sometimes, we have the earnings but we got a lot of them.

Feroldi: You're welcome, Chris Hill, you're welcome.

Lewis: Brian, thank you so much for joining me on today's show.

Feroldi: Thanks and have a wonderful weekend.

Lewis: You too. Listeners, that's going to do it for this episode of Industry Focus, if you have any questions you want to reach out and say "Hey," shoot us an email at [email protected] or tweet us at @MFIndustryFocus. If you want more of our stuff, subscribe on iTunes or wherever you get your podcasts. As always, people on program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear. Thanks to Tim Sparks for all his work behind the glass today and thank you for listening. Until next time, Fool on.