Pinterest's Down 60%, but Will a New CEO Unlock Massive Potential?

Over the past few years, social media app Pinterest (PINS 0.43%) has seen the highs and lows of market sentiment. During the bottom of the pandemic dip, shares fell to $11. Several quarters of strong user growth fueled by pandemic lockdowns spurred on a bull run that saw Pinterest's price skyrocket to $89 in early 2021, only to fall more than 80% over the next year and a half. At the time of this writing, shares are trading for approximately $25.

Much of what drives Pinterest's price movement is its user growth and how those users are monetized. New CEO Bill Ready was brought in to take Pinterest to the next level and unlock its potential. Taking a look at some key metrics may provide some insight into whether his plan can work.

A unique offering that drives user growth

Pinterest sits at an interesting intersection of social media and idea inspiration. Its users (called Pinners) visit the site to find ideas for everything from vacations to home projects. In this sense, Pinners benefit from Pinterest's network effect. Put simply, the more users on the platform sharing content (called Pins), the more beneficial the platform is to users.

In its time as a public company, user growth has been the main story, and it's been impressive. Pinterest specifically looks to its monthly active users (MAU) to show engagement and user growth on the platform. While the MAU growth has slowed (and caused much of the stock's sell-off), zooming out shows impressive growth over the long term.

Data source: Pinterest. MAU = monthly active users. Chart by author.

If we spread this growth out evenly, the MAU count has grown at a compound annual growth rate (CAGR) of 21.4%. This shows that, despite the hand-wringing over recent MAU slowdowns, user engagement has grown at a healthy clip over the past six years.

Monetizing engagement

Along with user growth, Pinterest reports average revenue per user (ARPU) to demonstrate its ability to monetize users on its platform. Growth in ARPU has tracked almost identically with MAU growth. ARPU over this same time frame has also grown at a CAGR of 21.4%.

Data source: Pinterest. Chart by author. ARPU = average revenue per user.

Perhaps more interesting is the breakdown of ARPU by region. Using the most recent quarter as an example, ARPU from the U.S. and Canada makes up the overwhelming majority of overall ARPU. However, the smallest slice of that pie is growing the fastest year over year (YOY).

Data source: Pinterest. ARPU = average revenue per user. YOY = year over year.

The comparatively small amount of revenue from the international segment and its robust growth is an opportunity for Pinterest. However, to capitalize on this opportunity, the company must up its game with advertisers and make the platform much more "shop-able."

A new CEO on a mission

New CEO Bill Ready took the corner office in July and brings to Pinterest years of e-commerce experience at Alphabet's Google and Paypal. From a resume perspective, Ready certainly has the pedigree to help Pinterest take its next steps as a company.

According to Ready, digital retail is in a transition from buying (where customers already know what they want) to shopping (where customers are looking to see what they want). You can think of this as digital window shopping. If Ready is right, Pinterest is perfectly situated to turn shoppers into buyers by serving relevant ads and easy ways for Pinners to turn their inspiration into transactions.

The good news for Pinterest is that it's in a financial position to invest in the technology needed to make this transition and drive more sales on its platform. Over the first half of this year, Pinterest has generated $333 million in operating cash flow, ending Q2 2022 with $2.7 billion in cash, cash equivalents, and marketable securities on its balance sheet.

Can Pinterest unlock its potential?

Much of the recent sell-off has been due to a normalization of the valuation after the market got way ahead of itself while Pinterest was pulling forward years of growth during the pandemic. This is why zooming out is helpful. In that sense, I don't see the pullback in share price to be indicative of a business in trouble.

Monetizing users has always been important to Pinterest's long-term success as a company. That former CEO and co-founder Ben Silbermann knew enough about where Pinterest needed to go to step down and hire Ready tells me the company is on the right track.

On a price-to-sales (P/S) basis, Pinterest is about as cheap as it's ever been. The historic growth, revenue-generating potential, and new CEO with a vision make Pinterest a buy in my book.