Long-term investors in Pinterest (PINS 0.94%) have experienced a genuine roller-coaster ride. After the company went public in 2019 at $19 a share, the stock sank to a low of $10.92 during the pandemic crash of 2020. Then it surged, reaching an all-time high of $89.15 less than a year later. But since early June 2021, it has been back on a downslope, and after all those maneuvers, on Thursday, it was once again trading in the neighborhood of $19.
Because the past few years in the stock market have been so volatile on a large scale, it's hard to tell how much of Pinterest's share price movements have been due to its business performance, and how much should be attributed to the broader market conditions. At least within the company, it appears there has been a realization that changes need to be made, and this week co-founder Ben Silberman stepped down as CEO. Let's consider what the pending leadership change might mean for the future of the business.
Growth and advertising
Pinterest is a social media platform where users come for ideas and inspiration. By "pinning" ideas they like to boards, users can share what excites them, and refer later to these ideas in order to turn their inspirations into reality. For most of Pinterest's history, the story has been about user growth and the revenue generated by selling ad space to go alongside its user-generated content.
With that in mind, consider how a couple of its key performance metrics have grown over the years.
Monthly average users (MAU)
Average revenue per user (ARPU)
Clearly, Pinterest's business strategy of attracting users and then serving them ads has largely been a success. However, what has concerned investors more recently is how this growth has slowed. MAUs have decreased 9% since the beginning of 2021 and ARPU has been choppy, jumping between $1.32 and $1.93 over that same timeframe. If growth continues to slow and ARPU can't consistently grow, it's going to be increasingly difficult to sell ad space on the platform as the advertisers won't see the return on their investment.
In an effort to keep monetizing its platform even as user growth slows, Pinterest has been trying to build into the platform a better shopping experience for users. In Q1 2021, it launched the Pinterest API for shopping, which gives merchants the tools to provide information such as item pricing and availability to the social network's users in real time. If successful, shopping on the Pinterest platform could open up a significant new revenue stream for the company.
A new CEO for a new direction
This push into shopping on the Pinterest platform leads directly to the change in CEOs. Replacing Ben Silberman in the corner office will be Bill Ready, who comes to Pinterest from Alphabet's (GOOG 1.15%) (GOOGL 1.01%) Google commerce business. Prior to his time at Google, Ready was executive vice president and chief operating officer at PayPal (PYPL -1.96%).
Ready brings to Pinterest a set of experiences that seems to directly speak to the direction the company wants to take. While at Google, Ready led efforts to improve the company's e-commerce efforts. Specifically, Ready worked on incorporating frictionless buying opportunities for users into YouTube and Google search pages.
The question will be whether Ready can drive the changes necessary to increase revenue while maintaining the in-app experience that Pinterest's users have come to expect. One area in particular where there may be the most opportunity is among its international users. In Q1 2022, ARPU for international users not in Canada or Europe increased 164% year over year and revenue grew 152%. However, both of those figures reflect growth off of relatively small bases.
So is the stock a buy?
The steep run-up in stock price that Pinterest enjoyed over the course of 2020 and early 2021 was driven by a massive pull-forward of growth as people living through pandemic lockdowns sought out new online diversions. With that tailwind essentially extinguished, the stock price crashed, which has brought the company's valuation down considerably.
Pinterest currently trades at a price-to-sales ratio of 4.7, near its all-time low. That's cheaper, but not necessarily cheap, demonstrating that the market is still pricing in some expectations of growth. There's a good reason. Despite the slowing monthly active user growth, Pinterest still grew revenue by 18% and generated $206 million in free cash flow in Q1 2022.
For investors who believe that making shopping on Pinterest more appealing will drive the growth it's seeking, this CEO transition is a good sign. There's a case to be made for buying shares at today's valuation and waiting to see if the strategy is successful. That said, for those who want to wait and see, there should be profitable opportunities to buy shares down the road.