Pinterest's Second Quarter: Everything Investors Need to Know

Pinterest (PINS -0.52%) fell sharply after its second-quarter earnings report on disappointing user growth metrics. However, in this Fool Live video clip, recorded on Aug. 5, Fool.com contributor Trevor Jennewine discusses the key numbers and why the stock could still be a long-term winner. 

Trevor Jennewine: So, I'm going to be talking about Pinterest's quarter-two report today. The company reported earnings last week and if you follow the stock, you've probably noticed that it fell 18% the following day. I want to say shares are down over 35% maybe from their 52-week high now, and like Matt mentioned, there were some headwinds with the monthly active users, so we'll get into that in a second.

But just to refresh everybody's memory on what Pinterest does. It's a social media platform, it's a little bit different than some of the others out there. Pinterest is designed for inspiration. People go to the platform maybe looking for new pair of shoes or a new recipe, or maybe tips on remodeling their house. That makes Pinterest a great place for advertisers to reach consumers. Let's say you're remodeling your kitchen, you go to Pinterest, that's a great time for an advertiser to say, how about this light fixture, how about this countertop? That's how Pinterest generates their revenue through the digital ads.

With that, let's jump right into some of the numbers. During the first quarter, revenue on a global basis was up 125%. Very impressive growth there, and it was strong in both of their geographies, 227% internationally, 107% in the United States. Revenue up to $613 million total. A couple of things that are worth pointing out about that. That growth is coming on top of a weak growth last year. During the second quarter in 2020, the coronavirus pandemic was ramping up, there were social distancing precautions being put in place, so people were spending more time at home, but at the same time, the economic environment was relatively uncertain. Advertisers were pulling back on their spend.

A year ago, Pinterest only had 4% growth in the second quarter so that 125% growth is a little bit high because of that. Still impressive though. The other thing that's worth mentioning is that $480 million of the $613 million in revenue comes from the United States. That's about 78% of Pinterest revenue is still based in the U.S. Then moving to the average revenue per user. This metric takes Pinterest revenue, divides it by its user base. It gives you a sense of how well Pinterest is monetizing its user base. Globally, this figure hit $1.32. That's up 89% over the prior year. Once again, strong growth internationally and in the U.S. with 163% growth outside the United States and 103% growth in the biggest market within the United States.

But again, like I mentioned on the last slide, it's a little bit skewed because of what happened last year with the pandemic. Specifically last year in the second quarter, the average revenue per user actually dropped. In Q2 2019, it was $0.88 and then it dropped to $0.70 last year. If you look at it over a two-year period and you normalize for the effects of the pandemic, what you see is about a compound annual growth rate of 22%. Still solid, but not as strong as the 89% growth that the company posted in the most recent quarter. Turning then to the monthly active users, this is where the company really hit some headwinds in the most recent quarter.

To put this all in context, like I mentioned in the second quarter last year, social distancing orders or precautions were being put in place. Consumers were spending more time at home. They had a lot more free time on their hands. One of the things they did was spend time browsing through Pinterest. Last year we saw 39% increase in the monthly active users in the second quarter, and that has ticked steadily downward. Then it really decelerated in the most recent quarter only added 9% more users in the most recent quarter. That number is at 454 million now.

Then breaking that down in the Pinterest different geographies. Internationally, user growth was at 13%. Then the big takeaway here is that U.S. users actually dropped 5% to 91 million. That decline was actually more pronounced if you look at the sequential progression. Falling from 98 million last quarter to 91 million this quarter. Then management added some color to this during the commentary on the earnings call. They mentioned that the deceleration or the decrease in user engagement has continued into July. They didn't provide any guidance for Q3. I think that rattled investors a little bit, too, but they did provide some revenue guidance.

So they're looking for about mid-40% range revenue growth in the third quarter. Those three things: slowing monthly active user growth, no guidance for monthly active users in the third quarter and combined to send the stock down 18% the following day, so pretty big drop. But I do want to point out a few other things from Pinterest's most recent quarter, specifically on the income statement, the company did post $71 million in income from operations. Positive operating income as compared to $105 million loss last year. In terms of profit, they posted $0.10 per diluted share as opposed to a loss of $0.17 last year. Profitability, things are moving in the right direction. If you're a shareholder as I am, that's good to see. Then the balance sheet looks pretty strong as well. Pinterest has a strong net cash position, about $2.1 billion in cash and that's compared to no long-term debt. That means the company competed quickly. They can capitalize on growth opportunities as they arise. They don't have any interest payments that are eating into profitability. Those are all good things from a shareholder's and the company's perspective.

I wanted to wrap up just by pulling a few more comments from management into the picture here. I mentioned that user growth was much slower this quarter, grew 9%, and in the U.S. it actually dropped 5%. But just to fill out that picture a little bit more. The users that were lost, management mentioned they were coming from the web. These are people that might be searching on Google [Alphabet]. They find a link, click it, and that's how they wind up on Pinterest. These tend to be less profitable and less engaged users. By comparison, the mobile users, so the people that have the app on their phone they're intentionally going directly to Pinterest. These people tend to be more engaged, more profitable and there was actually stronger growth in the mobile users. There is actually positive progress in the United States and 20% growth in mobile users internationally. That's a little bit of a silver lining. Still, never good to see your user base or customer base get smaller as a business, but a little bit of a silver lining there.

Then maybe more importantly, Pinterest also seems to be gaining traction with younger generations. Management mentioned that Gen Z or people under 25 years of age are actually the fastest-growing generation on the platform and they saw double-digit growth year over year during the most recent quarter. Then two other things that just, that caught my eye. Going back to what Pinterest purposes it as a platform for inspiration, helps people discover new ideas. One of the ways the company approaches that is by bringing as much inspirational content as they can onto the platform.

Last year they partnered with Shopify (SHOP -2.37%), which has about 1.7 million merchants now. What they did is they made it very easy for Shopify's merchants to upload their product catalog onto Pinterest's platform. They expanded that integration or that partnership out into the international markets earlier this year. In the most recent quarter, Pinterest saw a 50% increase in catalog uploads. They're just bringing more content onto the platform and the idea is that it provides a little bit more utility for users and by engaging users more, the idea is that you bring more ad revenue or ad spend onto the platform.

From the same perspective, management's also been focusing on transitioning past inspiration and making it a place where people can take action as well. You go to Pinterest, maybe you are trying to remodel your kitchen and you find a light fixture or a counter that you like. You go to Pinterest and you find that, and then as things are right now, you have to click the link, you're redirected to a different site, you might have to sift through their products, add it to the cart, go through the checkout process. There's quite a few hurdles between Pinterest and the actual purchase or the conversion. To help decrease the friction with that process, management is going to pilot on-platform transactions later this year. Basically, when you find something you like on Pinterest, you'll be able to buy it right there, you won't have to jump through all those hurdles.

Again, this could be something that really makes Pinterest more valuable to the users because it makes it easier for them to find what they're looking for and then purchase it. But it should also make Pinterest more valuable to the brands and advertisers from which it generates revenue. Anytime you can bring people closer to checkout, that's going to be a good thing for brands. Those are two things I'm keeping my eye on as opposed to what's going to happen later this year.