Where Will Pinterest Be in 1 Year?

Pinterest (PINS 0.89%) posted its first-quarter earnings report on Wednesday, April 27. The social media company's revenue rose 18% year over year to $575 million, which beat analysts' expectations by more than $2 million. Its adjusted net income dropped 12% to $69 million, or $0.10 per share, but still exceeded analysts' estimates by $0.06.

The platform's total monthly active users (MAUs) fell 9% year over year to 433 million, marking its second straight quarter of year-over-year declines. However, it still gained 2 million MAUs sequentially, which finally ended a three-quarter streak of quarter-over-quarter declines.

Image source: Pinterest.

Pinterest's stock price popped after its earnings release, but it remains nearly 80% below its all-time high from last February. It's also hovering just above its IPO price of $19 per share from three years ago. Will this unloved social media stock finally break out of its rut and rebound over the next 12 months?

Why did Pinterest's stock crash?

Pinterest's growth skyrocketed during the pandemic as more people stayed at home and searched for more hobbies, recipes, family activities, DIY projects, and online shopping ideas on its virtual pinboards.

Between the first quarters of 2020 and 2021, its MAUs surged 30% to a peak of 478 million. But over the following year, the lockdown measures ended, more businesses reopened, and Pinterest lost a whopping 45 million MAUs.

Data source: Pinterest. YOY = Year over year.

The company's brief takeover talks with PayPal Holdings last October and the subsequent departures of several key executives, including its co-founder and creative chief Evan Sharp, raised even more red flags.

Nonetheless, Pinterest's average revenue per user (ARPU) and total revenue continued rising even as it lost MAUs -- which indicated it could still squeeze more revenue from its existing users. 

Data source: Pinterest. YOY = Year over year.

As a result, Pinterest's revenue still rose 52% to $2.58 billion in 2021. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) surged 167% to $814 million, which boosted its adjusted EBITDA margin from 18% to 32%.

What's next for Pinterest?

Pinterest's top priority will be to stabilize its MAU growth in a post-lockdown world. The loss of stay-at-home tailwinds, a search algorithm change at Alphabet's Google, and the adverse impact of the Russia-Ukraine war on its European business all caused its MAUs to decline in the first quarter. 

During the conference call, CFO Todd Morgenfeld warned that its second-quarter MAU growth would still be impacted by those headwinds along with the seasonal impact of more travel and outdoor activities.

Moreover, Morgenfeld noted that Pinterest's heavier investments in short videos, which have diverted some resources away from marketing and other user-acquisition strategies, could "come at the cost of some MAUs in the short term as we get the ecosystem off the ground." Pinterest's rollout of its Idea Pins -- which are similar to Snap's Snapchat Stories or Meta Platforms' Instagram Stories but not ephemeral -- has also been reducing its near-term revenue growth because those stories are tougher to monetize.

As a result, Pinterest only expects its revenue to rise about 11% year over year in the second quarter. Its adjusted EBITDA margin -- which fell four percentage points year over year to 13% in the first quarter -- could also continue to decline as it ramps up those investments.

On the bright side, Morgenfeld predicted that the "pandemic unwind will no longer create a year-over-year MAU headwind in the third quarter of this year." Therefore, Pinterest's MAU and revenue growth might stabilize in the second half of the year as it drives more users to its native videos, Idea Pins, and its "social shopping" ecosystem of pinned online catalogs.

Is Pinterest's stock too cheap to ignore?

Analysts expect Pinterest's revenue to grow 21% to $3.12 billion in 2022 but for its adjusted EBITDA to decline 11% to $723 million. Based on those expectations, Pinterest trades at four times this year's sales and 17 times this year's adjusted EBITDA.

Meta, which is growing slower than Pinterest, trades at four times this year's sales and eight times this year's adjusted EBITDA. Snap, which is growing much faster than Pinterest, trades at eight times this year's sales and 60 times this year's adjusted EBITDA.

Based on those comparisons, I'd say Pinterest is reasonably valued -- but it isn't dirt cheap. Therefore, I expect Pinterest's stock to tread water for at least a few more quarters as investors wait to see if it can lock in more users. Rising interest rates and other macro headwinds should also keep Pinterest's valuations depressed as investors shun more speculative turnaround plays.