Pinterest (PINS -0.16%) had one-fifth of its market valuation wiped away last month after reporting second-quarter earnings indicating it may have reached a saturation point in its biggest, most important market.
If that is what's happening, it is a big red flag for investors thinking of buying into the idea organization stock, as it means it could be a long slog through slow or uneven growth going forward. But if it's a one-off event, it could represent a buying opportunity as the stock sits more than 36% below the 52-week high it reached in February.
So let's examine the bull and bear cases and see whether Pinterest stock is a buy this month.
The bull case
Nominally a social media stock, Pinterest is different from Twitter (NYSE: TWTR) and the like because its primary purpose is to help people use the power of crowds to collate ideas, whether it's what to wear, what to eat, or how to decorate your home.
By allowing users to sort their life's ambitions through visual representations that can be "pinned" to the site for easy reference and callback, Pinterest has amassed a huge following, some 454 million monthly active users (MAUs) globally as of the end of June, which shows the potential for this visual discovery platform.
It's just a fraction of the massive following other social media platforms possess, such as Twitter, which has 206 million daily active users (DAUs), or Facebook (NASDAQ: FB) with 1.9 billion DAUs and 2.9 billion MAUs.
Yet Pinterest has something those other platforms don't: Often, its users are looking to actually buy something -- that's typically why they're pinning ideas in the first place -- so it has a natural affinity with advertising on its sites. Ads are an actual benefit on Pinterest, whereas users rush to minimize ads on other platforms.
Pinterest reported revenue jumped 125% in the second quarter to $613 million as large advertisers returned en masse, while international advertisers also saw the value in reaching Pinterest users, contributing 22% to total revenue. The company ended up turning a $69 million profit compared to a $100 million loss a year ago, showing Pinterest certainly has the potential to greatly expand in the U.S. and abroad.
The bear case
While the above is hopeful, the fact is that U.S. Pinterest users fell 5% to 91 million MAUs in the quarter, suggesting most of the gains it saw over the past year came from bored women -- two-thirds of Pinterest's user base is female -- stuck at home because of the pandemic and looking to fix up their homes.
While Gen Z users grew at double-digit rates in the quarter, helped along by the Idea Pins tutorials it introduced, we also know the coronavirus outbreak led to massive home improvement growth as people sought to beautify the places they were spending inordinate amounts of time in.
We're now seeing some pandemic winners report financial results indicating that momentum is dissipating. Online retailer Wayfair (NYSE: W), for example, saw a 10% drop in sales as the company enters what it calls "probably the murkiest moment of 2021."
The water is pretty turbid for Pinterest, too, which expects revenue growth to decelerate to "the low-40% range" in the third quarter and for U.S. MAUs to continue falling. They were down 7% at the end of July when it issued its earnings release. Pinterest says it can't predict where MAUs will be next quarter because there is no clarity on how it will play out.
Moreover, Pinterest is planning a big change in how it delivers the user experience, one that is going to affect revenue, at least short-term.
CFO Todd Morganfeld says Pinterest is building a "new ecosystem" for users, one that transitions from viewing pins in a static manner to one "where people go to discover the best native immersive lifestyle content" out on the internet. That means Pinterest will lose some high-value advertising inventory as users leave the platform to explore, but hopes to regain user engagement later on.
A potentially saturated home improvement market and a new business model that offers no guarantee of success are headwinds Pinterest will have to navigate.
While the pandemic gave Pinterest a tremendous lift for which it's now seeing a letdown, it should be remembered that looking at the two-year history, the platform's MAUs are 51% higher than what they were in 2019. Last year was obviously a one-off event whose pace of growth could not be maintained, and what investors are seeing might not be abandonment of the site, but rather just a return to the mean. Year-over-year growth may go down, but the two-year stack shows it's still expanding.
However, the difficult comparables it is going up against, coupled with a new way to engage with users, is uncharted territory that could sap a lot of Pinterest's growth potential until it works out all the kinks.
Even with the haircut Pinterest stock took, it still trades at more than 200 times trailing earnings, 42 times next year's estimates, 17 times sales, and over 100 times the free cash flow it produces.
Investors might be better off waiting for proof this new engagement policy will work to Pinterest's benefit before jumping, by which time they'll probably get a better price for the social media stock, too.