Is Pinterest Stock a Buy?

Pinterest (PINS -0.52%) took investors on a wild ride in late October amid rumors that PayPal (PYPL 0.64%) wanted to buy the social media company for roughly $45 billion, or approximately $70 per share.

Pinterest's stock skyrocketed on the news, but it quickly gave up those gains after PayPal said it wasn't interested. Pinterest also scheduled its third-quarter earnings report for Nov. 4, which indicated the company wasn't expecting to be bought out anytime soon.

Image source: Pinterest.

Many investors likely expected Pinterest to post disastrous numbers since its monthly active users (MAUs) fell sequentially in the second quarter and its co-founder and chief creative and design officer Evan Sharp recently resigned. Also since Apple's (AAPL 1.27%) privacy changes on iOS had already disrupted Meta (META -0.52%) and Snap's (SNAP -2.72%) advertising businesses in their latest quarters, similar disruption was expected for Pinterest.

But Pinterest's third-quarter report actually wasn't that bad. Its revenue rose 43% year-over-year to $633 million, beating estimates by $1.8 million. Its adjusted net income surged 119% to $190.5 million, or $0.28 per share, which topped estimates by a nickel. Does that earnings beat indicate it's finally time to buy Pinterest's beaten-down stock, which already lost about a third of its value this year?

It's still losing MAUs

Pinterest gained a lot of MAUs throughout the pandemic as more people stayed at home and searched for hobbies, recipes, DIY projects, and online shopping ideas on its virtual pinboards.

However, its MAUs started to decline this year as the COVID-19 restrictions were relaxed. That sequential slowdown continued in the third quarter, but its global MAUs still rose year-over-year to 444 million:

Source: Pinterest.

Pinterest is still experiencing a post-pandemic slowdown, but it expects its MAU growth to stabilize in the future as more people return to the platform.

But its ARPU is still rising

Pinterest's sluggish MAU growth in the U.S. is still a sore spot since it still generated 79% of its third-quarter revenue from its higher-value domestic MAUs. However, Pinterest has been mainly losing its lower-value web-based MAUs in the U.S. instead of its higher-value mobile MAUs.

As a result, Pinterest's average revenue per user (ARPU) in the U.S. still increased 10% sequentially and 44% year-over-year in the third quarter. Its international ARPU also improved sequentially and year-over-year -- but remains significantly lower than its domestic ARPU:

Source: Pinterest.

Pinterest's ARPU growth continues to be strong because it didn't face any significant challenges from Apple's privacy changes on iOS during the quarter. Unlike Meta and Snap, Pinterest doesn't generate much revenue from app-install ads, which were severely affected by the iOS update. Pinterest also uses more first-party data and contextual ads, instead of targeted ads which rely on third-party data, so its own ads weren't significantly affected either.

Therefore, Apple's iOS update might generate tailwinds for Pinterest's advertising business as Meta's Facebook and Instagram and Snap's Snapchat struggle to adapt to those changes. Twitter also only saw a "modest" impact from Apple's iOS update in its latest quarter.

The road ahead

Pinterest didn't provide any exact guidance for the fourth quarter, due to the unpredictable comparisons to its pandemic-induced growth a year earlier. But, Pinterest believes the usage of its pinboards is still evolving, as a decline in stay-at-home interests (such as home décor and recipes) coincides with the growth of more evergreen interests like beauty and women's fashion.

For now, analysts expect Pinterest's revenue to rise 55% for the full year, then grow another 31% next year. Investors should be skeptical of those estimates, but they should also realize that Pinterest's core business remains strong -- even as it faces a sequential slowdown in MAUs. They should also remember that Pinterest enjoys an early-mover advantage against its industry peers in the "social commerce" space. Its pinboards encourage merchants to upload their entire catalogs as shoppable pins, and its partnership with Shopify could gradually transform the social network into an e-commerce platform.

Pinterest's stock lost its luster this year, but it now looks irrationally cheap at 34 times forward earnings and eight times next year's sales. Therefore, I believe it's still a great time to start a new position or accumulate more shares of this high-growth social media company.