What happened
Shares of Pinterest (PINS -1.55%) tumbled 16.6% in April, according to data provided by S&P Global Market Intelligence. For perspective, the S&P 500 was down 8.8%, so Pinterest stock underperformed by a wide margin. Moreover, the stock is down roughly 75% from its all-time high as of this writing. In short, it's been a painful ride for shareholders.
Pinterest released financial results for the first quarter of 2022 on April 27 and the analyst community lowered its future expectations as a result. But here's why you might want to take advantage of the drop and buy Pinterest stock in May.
April returns for Pinterest stock and the S&P 500. PINS data by YCharts
So what
In Q1, Pinterest grew revenue 18% year over year to $575 million and recorded a net loss of $5 million. Overshadowing this modest top-line growth was user metrics. Its global monthly active user base was 433 million, down 9% from the same quarter last year.
Wall Street analysts lowered their price targets for Pinterest stock across the board. For example, DA Davidson analyst Tom Forte lowered his price target from $33 per share to $20 per share, citing "engagement headwinds," according to The Fly. Other analysts concurred.
Simply put, investors aren't willing to buy Pinterest stock while the user base is starved for growth. That's a big reason the stock was down 16.6% in April.
Now what
Pinterest stock now trades at an all-time low valuation. Its price-to-sales (P/S) valuation is currently about 5. For perspective, this is lower than its valuation during the crash of March 2020 when uncertainty was at an inflection point due to the outbreak of the coronavirus.
Indeed, businesses with poor long-term prospects should trade at cheap valuations. Many believe this applies to Pinterest. But I believe its prospects are brighter than they seem. For example, consider that the company announced a partnership with WooCommerce and its 3 million merchants on April 13. The partnership makes WooCommerce merchants' products shoppable within Pinterest's platform.
Image source: Pinterest.
Pinterest has similar partnerships with other e-commerce companies like Shopify and it demonstrates Pinterest's strength as an ideal advertising medium. Pinterest users interact with the platform differently than other social media platforms, typically with a predisposition to buy things. The company takes this behavior, analyzes it, and provides value to advertisers.
As of Q1, Pinterest's average revenue per user (ARPU) was just $1.33, up 28% year over year. ARPU grew faster outside of North America than it did inside, which is good considering most Pinterest users are outside of the U.S. and Canada. Moreover, its user base increased from the previous quarter, so maybe things are starting to turn around.
Pinterest is monetizing users more effectively than ever, suggesting brighter days ahead. Because of this, it may be enriching to make Pinterest stock a contrarian buy in May.
