Is Pinterest Stock a Buy Now?

Pinterest's (PINS 0.89%) stock price soared 21% during after-hours trading on Aug. 1 following its second-quarter earnings report. The social media company's revenue rose 9% year over year to $665.9 million, but it missed analysts' expectations by $0.7 million. Its adjusted net income fell 54% to $77.4 million, or $0.11 per share, which also missed estimates by $0.07.

Pinterest's headline numbers looked grim, but its guidance for "mid-single-digit" year-over-year revenue growth in the third quarter allayed some fears about a deeper near-term slowdown. It also predicted its operating expenses would only rise by the low single digits sequentially.

Image source: Pinterest.

Elliott Management, the activist investing firm that took a 9% stake in Pinterest in June, also said it had increased that stake again (to an undisclosed percentage) to become its single-largest shareholder. In a statement, Elliott said CEO Bill Ready, who took the helm in late June, was the "right leader to oversee Pinterest's next phase of growth."

That vote of confidence suggested that Pinterest's stock was finally bottoming out after plunging more than 70% from its all-time high last February. But is it safe to buy Pinterest again before it fully stabilizes its business?

Its user growth remains shaky

Pinterest's user growth accelerated throughout the pandemic as more people stayed at home and searched for online shopping ideas, recipes, DIY projects, and other hobbies with its virtual pinboards.

Its global monthly active users (MAUs) soared to 478 million in the first quarter of 2021 but subsequently tumbled to 431 million by the fourth quarter of 2021 as lockdown measures were eased and people went outside again.

Pinterest ended the second quarter with 433 million MAUs, which represented a 5% decline from a year ago but only a slight decline from the previous quarter. During the conference call, CFO Todd Morgenfeld mainly attributed its year-over-year decline to the "last vestiges of the pandemic unwind," which had been "largely lapped" by the end of the quarter, and a search algorithm change at Alphabet's Google, which "resulted in fewer new users and resurrections."

Pinterest continued to lose MAUs sequentially in the U.S., Canada, and Europe, but it partly offset that slowdown by gaining more MAUs in higher-growth overseas markets like Latin America and Japan.

Data source: Pinterest.

Its revenue growth is stabilizing

However, Pinterest only generated 3% of its revenue from those Rest-of-World MAUs during the second quarter. That's because those MAUs still generate much-lower average revenues per user (ARPU) than its MAUs in the U.S., Canada, and Europe -- and they won't catch up anytime soon.

Data source: Pinterest.

On the bright side, Pinterest's ARPU continues to grow year over year in the U.S., Canada, and Europe -- which suggests it can offset its declining MAUs by squeezing out more revenue per user.

To do so, Pinterest plans to capitalize on its early mover's advantage in the social shopping market, which it previously established by offering "shoppable" pins for businesses. But other social networking platforms, including Meta Platforms' Instagram and ByteDance's TikTok, have also been promoting their own shoppable posts. Macroeconomic headwinds also continue to throttle the growth of the entire e-commerce sector.

It faces near-term headwinds

During the call, Morgenfeld warned that if "economic conditions continue to deteriorate" in the third quarter, it could "end up with revenue growth at the bottom end of the range or below in the low single digits."

Morgenfeld also reiterated Pinterest's prior expectations for its adjusted operating expenses to increase 35%-40% for the full year, even as it cools off its spending on a sequential basis in the second half of the year.

Pinterest's adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) margin fell 15 percentage points year over year to 14% in the second quarter but rose by a single percentage point sequentially. Investors should see if that sequential stabilization continues.

Has Pinterest's stock bottomed out?

Analysts expect Pinterest's revenue to rise 14% this year and for its adjusted earnings to decline 20%. In 2022, they expect its revenue and earnings to both rise about 20% as its business stabilizes.

Investors should take those estimates with a grain of salt, since Pinterest still faces some tough competitive and macro headwinds in the online advertising market. But based on those expectations and a price of $24 per share, Pinterest trades at about 26 times next year's earnings.

By comparison, Meta and Alphabet trade at 15 and 22 times forward earnings, respectively. Therefore, Pinterest's business might be stabilizing -- but I don't think its stock has bottomed out yet. Investors should keep an eye on Pinterest, but it's definitely not a screaming buy.