Pinterest (NYSE:PINS) was a market darling for much of the pandemic, but the image-based search engine has suddenly fallen out of fashion.

Two straight underwhelming earnings reports, a declining user base, and a busted deal with PayPal have all contributed to the stock's downfall. Shares are now down by about 50% from their peak this summer.

Indeed, many of the concerns that have pushed the stock lower are valid. For example, its declining user base is a concern, especially in the U.S., where its most valuable users are. The company faces significant headwinds from the economic reopening, which has pushed its audience away from some of its core use cases, including cooking, gardening, and home decor. This shift is one reason the company is struggling with user growth.

However, there's one area where Pinterest has excelled that the market has broadly overlooked: profitability.

Over the last four quarters, the company has made $762 million in adjusted EBITDA, or a 31% margin.

Based on its market cap of $30 billion, the stock is trading at less than 40 times trailing EBITDA. Free cash flow is also strong at $632 million. On an adjusted basis, the company is trading at a price-to-earnings ratio of just 43.6, which is not much higher than the S&P 500 P/E of 29.5 and significantly lower than comparable growth stocks.

Looking at Pinterest on an iPad

Image source: Pinterest.

A long profit lever

Only in the last few years has Pinterest begun building out its advertising business, which is still in its infancy in international markets where most of its user base is, but the margins above show that Pinterest will be tremendously profitable at scale. 

The company benefits from operating in a high-margin business -- digital advertising -- and its platform is especially popular with advertisers because many of its users want to see ads. Unlike users of other social media platforms, Pinterest users often come to the site with a purchase in mind, whether they want a wedding dress, a new couch, or children's entertainment. 

Pinterest's profits have come a long way in just a few years. In the third quarter, the average revenue per user (ARPU) reached $1.41, up from $0.90 in Q3 2019. However, the underlying growth in ARPU is even stronger than that because outsize growth in the international segment distorts the global figure. Domestic ARPU was $5.55 in Q3 2021, compared to just $2.93 in Q3 2019, while outside of the U.S., ARPU has jumped from $0.13 to $0.38. Given its momentum with new products like Story Pins and Idea Pins, and improved advertising tools like automatic bidding and budget optimization, and ad dollars shifting to digital channels, Pinterest's business should continue to grow even on a stagnant user base.

Don't get distracted by the user decline

Pinterest is one of several COVID winners experiencing a post-pandemic hangover. Netflix has seen sluggish growth at times after record subscriber additions in the first half of 2020, and Peloton stock plunged last week after equipment sales surprisingly fell, indicating a decline in new users. 

The user decline isn't as big a concern as it might seem. Many of the users that Pinterest lost were lower-value ones who signed up during the pandemic to distract themselves from pandemic boredom, and it's seen better performance from mobile app users, who tend to visit Pinterest more often.

The user decline also appears to be stabilizing, as the company said it had 89 million domestic monthly active users (MAUs) as of Nov. 2, the same amount it finished the third quarter with, and it's also returned to user growth globally with 447 million users on Nov. 2, up from 444 million, the first time it's experienced sequential growth since the first quarter of this year.

It's worth remembering that Pinterest already has more than a quarter of the U.S. population as MAUs and that its global MAU base is greater than the entire U.S. population. While growing its user base would certainly be positive, the company doesn't need to do that to be successful. What's more important is that it delivers value for its existing user base and advertisers, and the recent results show that it's doing just that.

Pinterest looks like a great value after the recent sell-off, especially as growth should reaccelerate in 2022. As the company's profitability scales up rapidly, those who buy Pinterest stock today are likely to be rewarded.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.