After a rumored acquisition deal with PayPal Holdings, all eyes have been on social media company Pinterest (PINS 1.40%). The company reported strong third-quarter earnings recently, beating both the top and bottom lines. However, both bears and bulls saw what they wanted to see in this earnings report. Bulls saw amazing average revenue per user (ARPU) growth while bears saw decreasing monthly active users (MAUs).
So how should you think about Pinterest? Two Motley Fool contributors battle it out, breaking down the bull and the bear case for Pinterest.
Bull Case: Growth isn't in the people
Jamie Louko: Eighty-nine percent of Pinterest users go to the platform with the intent to purchase, making it the only social media company where consumers actually want to see ads. Consumers go to Pinterest with an idea, hoping they will "know it when they see it," which allows Pinterest to not only show consumers advertisements but have consumers be grateful when they are shown well-targeted ads. Because of this factor, Pinterest has something that no other social media platform has: The opportunity to monetize its users at an amazing rate.
This massive advantage has yet to play out: In the most recent quarters, Snap's Snapchat had an ARPU of $3.49 globally, and Meta Platforms' (formerly Facebook's) global ARPU was a whopping $10. Pinterest, however, only had a global ARPU of $1.41. This was because Pinterest's international -- excluding the U.S. -- ARPU was just $0.38, compared to Snap's $0.98 and Facebook's $3.14. If Pinterest focused on monetizing each customer better and reached ARPU levels of its competitors, the company's growth could explode. Pinterest had revenue of $633 million and net income of $94 million in Q3 2021, and this could rise by multiples over the next five years if it is successful.
Pinterest has already been making strides to better monetize its user base, including Pinterest TV -- where consumers can buy items directly from creators on TV -- as well as other shopping features to make it easier for its 400 million users to purchase items.
While active users are important (you can't monetize a customer base of zero), it is not the key metric for the company. There are 98 million MAUs in the U.S. -- representing 30% of the U.S. population -- so the U.S. market is already near-fully saturated. It is the international market where the MAU growth potential is. While it is important that Pinterest does not lose customers at an increasing rate, if it can simply retain its 400 million MAUs and monetize them better, Pinterest will be able to grow by magnitudes. At just 13 times sales, Pinterest has a low bar to jump over, and if it can be successful at monetizing its user base while retaining its users, Pinterest has the potential to grow larger than its competitors.
Bear Case: Did Pinterest peak already?
Anders Bylund: As a social media network with a focus on image sharing, Pinterest saw booming user growth at the height of the coronavirus pandemic. The company is experiencing the uncomfortable backside of that spike nowadays, and I'm not convinced that Pinterest can justify its nosebleed valuation in the long run.
Pinterest is trading like an explosive growth stock. Its shares command lofty valuation ratios such as 188 times trailing earnings and 81 times free cash flows. Stocks in this category must support their sky-high valuations with incredible growth in sales and customer counts.
The company does deliver in some ways. In last week's third-quarter report, Pinterest saw global revenue rise 43% year over year to $633 million. That's a strong result, just ahead of Wall Street's consensus estimate of $631 million.
At the same time, people aren't exactly clamoring to sign up for Pinterest's services. Monthly active users increased by just 1% year over year to 444 million names. In the domestic market, which is Pinterest's most mature and profitable segment, the MAU tally fell by 10% to 89 million accounts.
Revenue still surged thanks to the rising marketing needs of advertisers. However, advertising revenue can be fickle and Pinterest isn't trying to offset that risk by charging for any of its user services. For example, I would not be surprised to see the healthy ad-buyer interest fading as these revenue-carrying customers react to Pinterest's disappointing user counts. Advertisers want to reach a large and growing audience with high engagement into the chosen ad platform's services, and this company isn't offering that combination anymore.
I don't see a sustainable way out of this pickle. Adding fees to the image-sharing service would surely decimate Pinterest's Rolodex of MAUs, and the completely ad-based business we see today is too risky for my taste.
Pinterest is by no means a "safe stock," and it is a risky investment going into the future. While the bull case is very appealing, it will not be a walk in the park for Pinterest to grow its ARPU. Investors who are interesting in Pinterest might make this a small position in a diversified portfolio, but should be prepared to hold it for the next five years or more. Investors who do not have a long time frame or who have a lower risk tolerance might want to simply watch Pinterest from a distance.