While many stocks have been trounced in the recent tech stock sell-off, few have fallen as hard as Pinterest (PINS 1.02%). Since peaking last February at nearly $90 per share, the stock has fallen off a cliff and sits around $26 a share, or about a 71% drop. Not all of the drop can be attributed to market over-reaction, as Pinterest has had some rough headlines this year related to a rumored PayPal Holdings takeover and a drop in monthly active users (MAUs).
After reporting fourth-quarter earnings on Feb. 3, the stock price took a step in the right direction by rising 11%. Analysts had set low expectations going in, so a beat wasn't difficult. However, it will take more than a few earnings beats to get investors back into the black on this investment. Were the results good enough to warrant hanging on to this fallen stock?
Pinterest's user base fell again -- but is there light at the end of the tunnel?
Heading into the quarter, analysts expected earnings per share (EPS) of $0.45 and revenue of $827 million, according to Refinitiv. Pinterest crushed these numbers by reporting EPS of $0.49 (a 9% beat) and revenue of $847 million (a 2% beat). Overall, quarterly revenue grew 20% year over year. Additionally, Pinterest sported an adjusted EBITDA (earnings before interest, taxes, debt, and amortization) margin of 41% with share-based compensation added back and 25% with it pulled out.
None of these metrics got the stock in hot water over the last year -- falling MAUs did. Sticking with this trend, Pinterest once again reported fewer MAUs.
Management warned investors of this trend last quarter but also gave some good news during the conference call. As of Feb. 1, MAUs were practically the exact same across the board as they were on Dec. 31, meaning the bleeding may have stopped. This is fantastic news for investors, as now they can focus on what I believe is the most important metric: average revenue per user (ARPU).
This metric measures how much revenue each user generates for Pinterest and is the primary driver of revenue growth once new customers are exhausted. ARPU saw great improvement in all regions during Q4, showcasing how Pinterest is improving its advertising and e-commerce listing business.
If Pinterest can stabilize its user base and grow its ARPU, the stock is just waiting to explode higher.
Perhaps no one has been hurt more by the stock drop than Pinterest's leadership. As of last May, insiders owned more than 53 million shares, or about 8% of current shares outstanding. They saw their collective share value tumble from $4.8 billion to $1.4 billion -- ouch. Potentially as a result of turmoil within the company, seven heads of different departments -- including the VP of sales and the head of core product -- left Pinterest over the past few months.
CEO and co-founder Ben Silbermann -- whose personal stake in Pinterest fell from $4 billion to $1.2 billion over the last year -- addressed this exodus in the quarterly conference call by explaining many of them left to join the same small private company. Regardless, if top executives like the CFO or Silbermann himself continue to leave, it could be a valid reason to dump the stock. If management doesn't have any confidence, neither should investors.
Management discussed four primary areas of growth Pinterest is focusing on: advertisement automation, ad relevance and optimization, international expansion, and shopping. According to Silbermann, their goal is for businesses to approach Pinterest with an advertising budget and product and Pinterest can take care of the rest. He also mentioned Pinterest is far away from achieving this goal. Additionally, Pinterest is trying to make ads and shopping less obvious and flow with the general scheme of the website.
On the international expansion side, Pinterest still has plenty of geographies to optimize. CFO Todd Morgenfeld attributed 2021's international growth to expanding into western Europe. In 2022, the focus will be rolling out Pinterest in Latin American countries, like Colombia, Chile, and Argentina, as well as monetizing Japan.
Pinterest's valuation is far from expensive after the stock price drop.
A forward price-to-earnings ratio of 28 for a company projecting growth of around 20% this year would be considered cheap. Because of this valuation, Pinterest is a relatively low-risk stock. Should MAUs stabilize -- as management indicated they are -- the stock really has no direction to go but up.
Throughout 2022, Pinterest might be rumored to be an acquisition target and continue to see some stock price volatility as a result. However, if Pinterest continuously turns them down, investors should be encouraged, as it means management believes future growth far outweighs the purchase price offered at the present.
With multiple monetization avenues in both domestic and international markets still to be perfected, Pinterest is a great stock to get in now. If you wait until Pinterest has succeeded by stabilizing MAUs and monetizing them, the stock price will have likely moved without you. If you buy in, holding for at least three to five years will give management time to execute its vision and generate the returns you want. Despite a rocky past year, Pinterest's future still looks solid.