Is Pinterest Stock a Buy?

Pinterest's (PINS 0.43%) stock price jumped 11% on Feb. 4 after the social media company posted its fourth-quarter earnings report.

Its revenue rose 20% year over year to $847 million, which topped estimates by $19 million. Its adjusted net income increased 15% to $339 million, or $0.49 per share, which also beat expectations by three cents.

Those growth rates look solid, but they also represent a significant slowdown from its previous quarters. In addition, Pinterest's total monthly active users (MAUs) still declined 6% year over year to 431 million, which marked its third straight sequential decline in MAUs.

Image source: Getty Images.

As a result, Pinterest's stock remains down 25% for the year and 70% below its all-time high. Let's see why Pinterest's stock stumbled, and whether or not it's worth buying again after its latest earnings report.

Why did Pinterest's stock crash?

Pinterest's growth accelerated significantly throughout the pandemic as more people searched for hobbies, recipes, DIY projects, family activities, and online shopping ideas on its virtual pinboards. However, that momentum waned as soon as the lockdown measures were relaxed.

The bulls claim Pinterest's growth was merely pulled forward, that its growth will stabilize in a post-lockdown market, and that it will eventually evolve into a "social shopping" platform. They also believe it has plenty of room to expand overseas.

The bears warn that Pinterest was a pandemic-era fad, that it faces too much competition from Meta Platforms' (META 1.54%) Instagram and ByteDance's TikTok, and that its rumored takeover talks with PayPal Holdings and its exodus of top executives indicate its business is running out of room to grow.

Pinterest could finally stop losing MAUs soon

Pinterest's slowdown over the past year certainly favored the bears:

Data source: Pinterest.

Pinterest also admitted that an algorithm change at Alphabet's (GOOG 0.37%) (GOOGL 0.35%) Google search engine throttled its sequential growth in domestic MAUs in the third and fourth quarters. During the conference call, CFO Todd Morgenfeld said its teams were "working diligently to understand this, but it may take some time."

That warning sounded dire, but Pinterest also said it had 86.6 million U.S. MAUs and 436.8 million global MAUs as of Feb. 1, which indicates its sequential slowdown could finally end in the first quarter of 2022.

Pinterest's ARPU continues to rise

Meanwhile, Pinterest's average revenue per user (ARPU) rose 23% year over year to $1.93 in the fourth quarter. Its ARPU also continued to improve sequentially -- both domestically and internationally -- over the past three quarters even as its MAU growth decelerated:

Data source: Pinterest.

Pinterest's core advertising business is well-insulated from Apple's (AAPL -0.57%) privacy changes on iOS, mainly because it relies on first-party and contextual data instead of third-party data sources.

During the conference call, Todd Morgenfeld said Pinterest experienced robust sales of ads to "large retailers, mid-sized, and managed small advertisers and international markets."

However, that growth was partly offset by its slower ad sales to consumer packaged goods companies (due to supply chain issues), and the rollout of more Idea Pins and native video content, which both generate lower revenue than its sponsored pins. Morgenfeld said that strategic shift -- which is comparable to Meta's focus on Instagram Reels -- would throttle its near-term revenue growth but become "revenue accretive over time."

Based on those expectations, Pinterest believes its revenue will grow in the "high teens" on a year-over-year basis in the first quarter, which is comparable to analysts' expectations for 18% growth and easily surpasses Meta's gloomy forecast for 3%-11% growth for the first quarter. Analysts expect Pinterest's revenue to rise 23% for the full year.

But what about its profitability and valuations?

Pinterest's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) grew 17% year over year to $351 million in the fourth quarter, but its adjusted EBITDA margin declined from 42% to 41%.

But for the full year, its adjusted EBITDA margin of 32% still improved significantly from its margin of 18% in 2020. Pinterest didn't provide a clear margin forecast for the first quarter, but it said its adjusted operating expenses would rise "around 10%" sequentially as it ramps up its investments in its native content and expands its R&D, sales, and marketing teams.

Nonetheless, analysts still expect Pinterest's adjusted earnings to grow 27% in the first quarter and 16% for the full year. Based on that forecast, Pinterest's stock looks reasonably valued at 21 times forward earnings.

Is Pinterest's stock worth buying again?

Pinterest's growth finally seems to be stabilizing. However, I believe its slowing growth and shift toward lower-revenue ad formats still make it a weaker investment than the blue-chip tech giants that generate comparable growth and trade at similar valuations. Therefore, investors might want to wait a few quarters before nibbling on Pinterest's volatile stock again.