After seeing Meta Platforms' quarter, investors would be forgiven if they expected dreadful results from another social media company, Pinterest (PINS 0.43%). However, that's not what Pinterest reported for the third quarter, causing its stock to rise nearly 15% the day after reporting.
With the stock still down over 70% from its all-time high, could this be the quarter that turns around Pinterest's stock?
Pinterest is getting more money for its ads
Social media companies derive most of their revenue from advertisements on their platform. While social media companies haven't been around for many recessions, the general trend is that companies slash their advertising budgets in these times to reduce expenses. Meta Platforms saw its revenue decline in Q3, but Pinterest kept growing.
| Company | YOY Q3 Revenue Growth |
|---|---|
| 8% | |
| Meta Platforms | (4%) |
Source: Pinterest and Meta Platforms. YOY = year over year.
To outperform what most consider to be the industry standard of social media companies is impressive. How did Pinterest do it? Not through more users, but by increasing how much each user generates. Its average revenue per user (ARPU) metric outperformed user growth everywhere but in Europe.
| Region | Monthly Active User Growth | ARPU | ARPU Growth |
|---|---|---|---|
| Global | Flat | $1.56 | 11% |
| U.S. and Canada | (2%) | $6.13 | 15% |
| Europe | 1% | $0.72 | (3%) |
| Rest of World | 1% | $0.11 | 38% |
Source: Pinterest.
Todd Morgenfeld, Pinterest's CFO, said the company is also just starting to monetize outside the U.S., focusing on Western Europe, Latin America, and Japan. That should excite investors, as it means Pinterest's growth story is just getting started outside the U.S.
As for user growth, it's evident Pinterest has essentially saturated its market, as it is barely budging in any region. Compared to Facebook's 1.98 billion daily active users, Pinterest's 445 million monthly active users don't utilize the platforms as much. This is critical to understand, as it's unlikely Pinterest will ever reach Facebook's $49.13 ARPU for the U.S. and Canada or $9.41 ARPU worldwide simply due to its narrower and less frequent use.
Still, Pinterest's growth case is centered around its increasing ARPU. To increase it, Pinterest has two options: Bombard users with more ads or increase the price. The first option could compromise the user experience resulting in user loss, which isn't ideal. The second option is a clear choice, and Pinterest is launching new capabilities to justify increased costs.
Expenses are rising much faster than revenue
Pinterest is increasing its advertising capabilities by improving its user data collection; that way, advertisers can better target their audience. Additionally, advertisers can utilize the new Pinterest Trends tool to see what works with their targeted audience.
Finally, it's improving its video advertisement capabilities, allowing its advertising clients to show off their products in more detail.
These are solid improvements, but they come at a cost. Expenses were up dramatically across the board in Q3 for Pinterest.
| Expense | YOY Growth |
|---|---|
| Cost of Revenue | 43% |
| Research and Development | 39% |
| Sales and Marketing | 42% |
| General and Administrative | 26% |
Source: Pinterest.
Cost of revenue rose because Pinterest is letting users personalize its platform more, which allows advertisers to target their audience better. However, investors will need to keep an eye on this, as it cannot continue to rise significantly faster than overall revenue growth, or Pinterest's gross margin profile will change significantly.
It isn't surprising to see its marketing expenses rise, as the company has launched multiple ad campaigns for its platform and research, and rising development expenses correlate with Pinterest launching new capabilities.
However, when most companies are focused on becoming more efficient, Pinterest isn't. In the fourth quarter, it expects expenses to rise low double digits, bringing its total expense rise to about 35% for the year.
All these expenses have cut into Pinterest's profits, as it is no longer profitable from a generally accepted accounting principles (GAAP) net income basis. Last year, Pinterest made $94 million in Q3; this year, it lost $65 million. This isn't a deal breaker for investors, but it's something to keep an eye on in 2023.
At a mere 6.1 times sales, Pinterest's stock isn't overvalued. I think investors can confidently take a position in Pinterest's stock, as they are making the right moves to be successful. However, they must keep an eye on Pinterest's expenses, as it could bite them if the economic environment worsens and advertisers cut spending even more.
