Social media platforms benefit from a strong network effect: The more people who use a particular platform, the more useful and compelling that platform is for its users.

That network effect goes both ways. As a social media platform loses users, the platform loses some appeal. That, in turn, makes it harder for the platform to reverse the trend.

Pinterest (PINS 0.43%) is the social media platform you kind of forget about until the company reports its results. It doesn't have the scale of Meta Platforms, the drama of Twitter, or the Gen Z user base of Snap. It does have more than 400 million monthly active users, so it's no slouch in the social media world. Unfortunately, that user base is being whittled away, particularly in the U.S.

A person using the Pinterest app.

Image source: Pinterest.

Better monetization, fewer users

Pinterest managed to grow its revenue by 9% in the second quarter. That's a big slowdown compared to last year, but the pandemic is no longer providing any real tailwind.

This revenue growth was not due to more users. Globally, monthly active users declined by 5% year over year. Every geographic segment suffered a decline compared to the second quarter of last year, with the U.S. and Canada seeing an 8% drop.

Pinterest was able to extract more revenue from the users who stuck around. In the U.S. and Canada, each user produced $5.82 of revenue during the second quarter, up nearly 20% year over year. Average revenue per user in Europe rose 19.4% to $0.86, while average revenue per user in the rest of the world nearly doubled to $0.10.

The positive spin on this is that outside of the U.S. and Canada, Pinterest has the potential to greatly expand its average revenue per user. Average revenue per user globally would need to nearly quadruple to match that metric in the U.S. and Canada.

The negative spin is that Pinterest is losing users everywhere, which raises the question of how the company will be able to greatly improve monetization without pushing even more users away. Pinterest is working on turning its platform into an online shopping destination, which certainly makes sense, given its visual nature. But so is nearly every other social media platform.

Despite the rise in revenue, Pinterest is back to posting big losses. The company was profitable throughout 2021, even on a GAAP basis. Those profits went out the window in the second quarter as the company ramped up spending. Total expenses rose 29% year over year, far outpacing revenue growth. Cost of revenue was up due to higher computing infrastructure spending, and operating expenses across the board rose along with headcount.

Pinterest has a new CEO, Bill Ready, who took over from co-founder Ben Silbermann in late June. Ready previously oversaw Google's (part of Alphabet) commerce products, so he brings with him experience that should help Pinterest grow the e-commerce side of its platform. With the user base seemingly stuck where it is, growth in advertising revenue is going to be limited.

If Pinterest can turn itself into an online shopping giant, a stagnating user base may not be a huge problem. But that will be easier said than done. An online merchant with an endless list of platforms on which to sell may see Pinterest's shrinking user base and not even bother. Pinterest and its new CEO have a lot of work to do.