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Why Investors Should Ignore Pinterest's Falling User Numbers

By Will Healy – Dec 8, 2021 at 6:55AM

Key Points

  • The company has suffered as users have spent less time online.
  • A key metric continues to drive meaningful revenue growth.
  • Pinterest also shows persistent growth in its international segment.

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Pinterest continues to grow where it counts most.

The slide in Pinterest (PINS -3.66%) stock has persisted, and it now trades close to its lowest levels in more than a year. The company has held an edge as pinning allowed it to learn about its users' passions, a competitive advantage when social media giants such as Meta Platforms must rely on less personal demographics and psychographics. But with the world reopening and usage numbers falling, investors continue to steadily sell off this stock.

Nonetheless, the company has exhibited signs of prosperity amid the bearish sentiment. Considering these indicators, investors may want to think about opening new positions in this company.

A person sits on the couch using a laptop.

Image source: Getty Images.

Why investors have sold off Pinterest stock

Pinterest stock prospered as the pandemic left its worldwide users trapped in their homes. However, in 2021, people have progressively returned to their normal offline activities. This has affected many stocks engaged in social media and e-commerce like Pinterest. But its stock has borne the brunt of this change. After selling for almost $90 per share as recently as February, the stock has dropped to $38 per share as of the time of this writing.

Amid the decline of just under 60% in the stock, investors have seemed to focus on one number -- monthly active users (MAUs). After peaking in the first quarter at 478 million, that number fell to 454 million in the second quarter and 444 million in the third quarter. Overall, MAUs grew by only 1% for the year, with U.S. MAUs dropping 10% during that time while international MAUs rose by 4%. It is also a significant reversal. MAUs increased by 26% in 2019 before the pandemic and surged by 37% in 2020.

Pinterest continues to prosper

Nonetheless, these investors appear to have ignored the reasons why Pinterest looks like a smart buy here. For the first nine months of 2021, Pinterest brought in more than $1.7 billion in revenue. This is a 75% increase compared with the first three quarters of 2020. Also, the income of $142 million for the first nine months of 2021 compares favorably to the $336 million loss in the same timeframe in 2020. The company achieved this profit primarily by limiting increases in expenses to 19%.

Pinterest can continue to achieve this growth as it continues to perform well in one critical area -- average revenue per user (ARPU). Overall, ARPU still climbed 37% year over year to $1.41. This includes a 44% increase in U.S. ARPU to $5.55 and an 81% rise in international ARPU, which accounted for 80% of its user base in Q3, to $0.38. These metrics also rose from the previous quarter, with overall ARPU at $1.32 in Q2.

Indeed, despite the drop in the stock price, many Pinterest bears feel its 77 price-to-earnings ratio is still too expensive. However, analysts forecast consensus revenue growth of 51% for the current year and 25% in fiscal 2022. This may help justify its current multiple.

Should investors take an interest in Pinterest?

The sell-off in Pinterest appears overdone. Clearly, MAUs have fallen during reopenings, and even after a massive drop in the stock price, its earnings multiple may appear elevated. Still, Pinterest exhibits substantial revenue and earnings growth despite lower usage. This shows that the rapid rise in ARPU has more than offset the declining usage numbers.

Moreover, international MAUs continue to rise, and Pinterest appears positioned to drive significant growth for the foreseeable future. Given this value proposition, investors may want to consider pinning a position in this social media stock.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Will Healy owns shares of Pinterest. The Motley Fool owns shares of and recommends Meta Platforms, Inc. and Pinterest. The Motley Fool has a disclosure policy.

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