Why Pinterest Revenue Is Soaring Despite Losing Users

Pinterest's (PINS -0.52%) pristine financials exceeded expectations despite a decline in users. In this clip from "3 Minute Stocks Updates" on Motley Fool Live, recorded on Feb. 16, Motley Fool contributor Brian Feroldi explains how the tech company's revenue grew due to its increase in average revenue per user.

Brian Feroldi: Let's move on to Pinterest, ticker symbol PINS. The company's numbers actually looked pretty good although the stock reaction was the opposite of pretty good. Revenue for the quarter grew 20% to $847 million. That was well ahead of Wall Street's estimate. It also beat management's guidance of high-teens revenue growth. On the bottom line, earnings per share on an adjusted basis grew 14%, so there was a little loss of leverage there due to some higher spending, but that also exceeded Wall Street's guidance. The rest of the income statement, mixed. Gross margin is up 100 basis points to 83%. That is a very, very good gross margin, especially considering that Pinterest relies very heavily on Amazon (AMZN -1.64%) Web Services to deliver its content. I didn't think there was a lot of leverage in that number, but gross margin has continued to tick up higher and higher over time. On the downside, operating margin on a GAAP basis dropped 800 basis points to 21%. Same with net margin, there was a one-time stock-based compensation trigger for one of the founders that was leaving, so that's just a one time thing that investors have to swallow for the quarter. On a free cash flow basis though for the full year, Pinterest had a great year. More than $700 million in free cash flow and the net income was up 17% to $339 billion. The balance sheet is pristine, $2.5 billion in cash, zero debt. Financially, things are good. So, what's the problem? The problem is users. Investors are not happy with where the company is trending on a user basis. Total users actually declined about 6% monthly active users to 431 million. In the U.S., they dropped from $98 million to $86 million. How do you get more revenue with less users? Answer, average revenue per user jumped a lot. It jumped to $1.93, up from $1.57 in the year ago period. Now, what's up with those users decline? Well, management said two things. One, Google (GOOG 0.74%) changed their algorithm in November of 2021 that lowered their search big traffic. No. 2, TikTok remains a headwind, and this is something that we heard from the likes of Facebook [Meta Platforms (META -0.52%)] and we heard from Pinterest. TikTok is growing so fast and taking up so much of users' time, that's a headwind for businesses like Pinterest. Is this doom and gloom forever? I don't think so. Management has a number of initiatives in place and they are bringing more ways for creators on their platform to actually earn revenue and to engage their users. That's a really good thing. They're also seeing big time success with shopping. I still think today that Pinterest is the second most monetizable platform social network from a shopping perspective. Hopefully, I'm not too wrong about that. Looking forward, management is guiding for high teens, year-over-year growth in the upcoming quarter that matches what Wall Street is expecting. They don't give any bottom line guidance but Wall Street expects again the company to be profitable moving forward. If I was to grade this report, I would say thesis mostly on track with yellow-ish of flags. The last two years, we saw such demand pull forward. User growth pulled forward in 2020. That makes 2021 comparisons far more difficult. I'm going to watch users, ARPU, engagement, and shopping here.