Shares of image-focused social media platform Pinterest (PINS 0.53%) soared on Friday following the release of its third-quarter financial results. Revenue was up, the overall user base was slightly up, and management said it expects growth for the remainder of the year. Those results surprised investors, who bid the stock up by 11.8% as of 11:14 a.m. ET.
Pinterest ended Q3 with 445 million monthly active users globally, up just slightly from the 444 million it had in the same quarter last year. However, the company's average revenue per user continued to climb. Consequently, its revenue rose by a more robust 8% year over year.
Pinterest had been experiencing a steady decline in active users in recent quarters, so it's understandable that the market celebrated its return to active user growth. However, there are a couple of more troubling trends for investors to be aware of.
First, management only expects mid-single-digit percentage revenue growth in the fourth quarter. That seems a bit slow to me. Consider that Pinterest just upped its monetization abilities by launching ads in select Latin American countries and by starting to offer its Pinterest Trends tool to advertisers, leveraging its valuable data. It concerns me that these monetization opportunities aren't leading to larger top-line gains.
Second, Pinterest swung from net income of $94 million in Q3 2021 to a net loss of $65 million in Q3 2022. A large portion of that loss came from the company's stock-based compensation expenses -- a topic worthy of an entirely separate discussion. However, Pinterest's cost of revenue jumped by a whopping 44% year over year, causing its gross margin to plummet to 73% from 80% in the prior-year period.
Pinterest's management said its gross margin fell because it was spending money to make the app "more personalized and relevant for our users while also delivering improved ROI [return on investment] for our advertisers." However, that's a somewhat vague explanation, and it doesn't speak to whether investors should expect this to be a blip or a trend.
In conclusion, Pinterest is still growing, which is good. But it has a long way to go to prove that it can grow for years to come and also deliver healthy profits consistently.