Is Now the Time to Buy Pinterest Stock?

The recent nosedive in tech stocks has resulted in many high-quality companies offering compelling buy opportunities. One to consider is Pinterest (PINS 0.43%), the online pinboard and social media business that describes itself as a "visual discovery engine."

Pinterest's stock hit a 52-week low of $27.75 on Jan. 24, and remains around $28. But before tech stocks were battered in 2022, Pinterest shares had already begun sliding after a 52-week high of $89.90 last February.

Its stock price dropped when the company's number of monthly active users (MAUs) declined in 2021 after years of consecutive quarterly growth. While a bearish outlook toward Pinterest is understandable, there's a reason for the drop-off in users, and Pinterest possesses qualities that make it compelling for investors with an eye toward the long term.

Image source: Pinterest.

The story behind user growth

Let's start by understanding Pinterest's user base decline. In 2019, the company added an average of 17.5 million global MAUs every quarter. That number nearly doubled to 32 million in the first quarter of 2020, and jumped almost threefold the following quarter as pandemic lockdowns began, and internet usage exploded.

Global MAUs kept growing until reaching a peak of 478 million in Q1 2021. But a slowdown was inevitable. As people increasingly returned to pre-pandemic activities last year, online usage declined. As a result, Pinterest suffered a drop in global MAUs, reporting 454 million in the second quarter, and sinking further in the third to 444 million.

Since the pandemic is ongoing, it's hard to know if Pinterest's MAUs have normalized at this point. But looking at the trend in MAUs over the years, the situation is far from dire.

Since fourth-quarter results aren't released yet, this table shows Pinterest's global MAUs at the end of the third quarter for each of the past few years.

Data source: Pinterest.

The company's 2021 MAUs remain well ahead of pre-pandemic numbers, revealing Pinterest has held on to a larger user base despite the declines.

Powering revenue growth

Pinterest is able to grow revenue by maintaining a core set of users through frequent improvements to its service while seamlessly integrating advertising -- the source of its income. 

For example, since users go to Pinterest to find inspiration in a range of categories such as home decor and fashion, a new video format called Idea Pins allows users to watch how to execute an idea. And in a nod to the metaverse, Pinterest grants the ability to virtually try on lipstick and other cosmetics.

On the advertising side, Pinterest integrated e-commerce into its platform, helping advertisers generate sales. It proved to be a win for both users and advertisers. Q3 user engagement across shopping-related content rose 60% year over year. The company is now increasing the shopability of Idea Pins.

Such efforts allowed Pinterest to expand its average revenue per user (ARPU). At the end of Q3, the company's global ARPU reached $1.41, a 37% increase over 2020. Pinterest's ARPU gains translate to revenue growth. The company generated more revenue through three quarters in 2021 than in all of 2020.

Data source: Pinterest.

Revenue growth is poised to continue. Pinterest's fourth-quarter guidance calls for a double-digit increase in revenue over the previous year. Moreover, global digital ad spending is forecasted to grow annually from last year's $491.7 billion to $785.1 billion by 2025, serving as a tailwind.

Excellent financial health

Pinterest also achieved a key milestone last year. While many tech companies operate at a loss for years, Pinterest reached profitability. Through the first three quarters of 2021, Pinterest's net income stood at $141.7 million compared to a net loss of $336.2 million in 2020.

Its balance sheet looks outstanding, exiting the third quarter with total assets of $3.2 billion compared to total liabilities of only $454.4 million. The company's Q3 cash and equivalents alone totaled $1.2 billion. With this cash, Pinterest can pursue acquisitions to further boost its stickiness. It did exactly that in December with the acquisition of Vochi, a video editing app that complements Idea Pins.

The drop in users has obscured the factors that position Pinterest to succeed in the years ahead. With its stock hovering near a 52-week low, now is a good time to consider an investment in Pinterest and holding for the long-term.