Shares of Pinterest (PINS -2.47%) have been hammered, with them hitting their all-time high almost a year ago. Shares are currently almost 70% off these highs, even though the company is making impressive strides in further monetizing its large user base.
The company reported its fourth-quarter earnings on Feb. 3, and few investors had high hopes. Meta Platforms reported weakness in its advertising business, making many investors believe Pinterest would suffer the same fate. However, the company hit it out of the park, beating Wall Street estimates on both the top and bottom lines by reporting $846.6 million in revenue and almost $175 million in net income for Q4. More than beating estimates, however, Pinterest reported three figures that should have made any long-term investor excited about its future.
1. Monetization is growing rapidly
Pinterest's idea-generating social media site has many investors hooked on the company. Many users go to Pinterest to get inspired to create, but oftentimes, consumers don't know exactly what they want until they see it. This puts Pinterest's business model, which consists of advertising revenue, in an optimal spot. On Pinterest, consumers want to see advertisements to get inspired -- something no other social media site can claim -- which could make its advertising space incredibly valuable.
Therefore, the name of the game for Pinterest's success is getting its users more engaged and increasing the ad dollars received per user, and the company did just that in Q4. Pinterest grew its average revenue per user (ARPU) by 23% year over year (YOY) globally, driven by the impressive growth of 62% in its international ARPU. Throughout 2021, these figures increased even more. The company's international ARPU for the year was $1.59 -- representing 80% growth compared to 2020 -- and its total ARPU grew 36% to $4.26.
These ARPU figures are the highest they have ever been for Pinterest but are peanuts compared to other social media stocks. Meta's global ARPU for 2021 totaled $40.96 -- almost 10 times that of Pinterest's. Considering Pinterest's user experience is improved by ads, whereas ads on Facebook or Instagram deteriorate the user experience, the opportunity for Pinterest to have its total ARPU is wide open and could feasibly be 10 times or more from here.
2. A financial powerhouse
With so much opportunity in Pinterest's ability to grow its ARPU, some investors may think the company is small and financially unstable. However, the company's financials are incredibly robust. The company posted $316 million in net income in 2021 and $744 million in free cash flow --– representing 29% free cash flow margins.
This massive free cash flow generation is not going to waste. The company is investing heavily in decreasing the friction between users finding and buying products on Pinterest. It has been investing in Catalogs, which make it easier for users to buy products they find, and saw major success in 2021.
Publishers have been rapidly adopting Catalogs, with Q4 uploads doubling YOY in the U.S. and growing 400% in international markets. The company is also expanding its augmented reality lens capabilities into the home decor shopping space. Now, its AR lens can be used for home decor and makeup, and the expansion efforts will likely continue.
3. User base remains high
Lastly, it is important to keep in mind that Pinterest has major dominance across the world. Shares have been crushed because of the company's decreasing user base, and in Q4, the company lost 6% of its user base YOY. However, the company still has 431 million users, which make up 6% of the entire worldwide population and represent 130% of the U.S. population. While a drop of 28 million users compared to the previous year might seem large, keeping its total user count in perspective is key.
In addition to having a major market share worldwide, the company's days of decreasing users might be coming to an end. In the company's Q4 results, management noted that its monthly active users, as of the end of January 2022, reached 436.8 million -- a sharp improvement from just a month earlier. This shows signs that the company might have hit its bottom, and its user count could flatten out and even increase going forward.
Why right now could be a buying opportunity
This company is relatively cheap at a valuation of just 5.7 times forward sales and 28 times forward earnings. Especially when compared to Snap, which trades at 79 times forward earnings and 11 times forward earnings, the discount Pinterest has right now is incredibly large.
The company has major growth ahead, and the thesis seems to be on track, with its impressive ARPU growth and investments, to make its platform better. I will likely be buying more shares soon, and long-term investors who don't own Pinterest might want to consider doing the same.