Are investors starting to believe in Pinterest (PINS 4.04%) again? The stock jumped immediately following the social media company's late October earnings release, which showed a return to user growth in the three-month period that ended in late September.
Pinterest's share performance in 2022 still trails the market by a wide margin thanks, in part, to worries about slowing sales and collapsing profitability. But given its recent performance, does this stock price slump represent a great buying opportunity?
Pinterest is getting back to growth
The best news in Pinterest's latest earnings update was its return to user growth. After monthly active users fell by 6% in the first quarter and by 3% in the second quarter, the social media platform broke back into expansion mode through late September.
Sure, its 445 million global user level was less than 1% higher, year over year. And Pinterest continued losing subscribers in the core U.S. market. But the latest numbers indicate stabilization following big engagement spikes, and then declines, tied to the pandemic.
"I'm proud of the solid results our team delivered in Q3," CEO Bill Ready said in a press release that trumpeted Pinterest's return to user growth. The stock jumped in response to the suggestion that the worst of the growth hangover has passed.
Pinterest is still struggling with profits
Pinterest isn't yet demonstrating the type of profit strength that would signal big earnings growth ahead. It generated a net loss in the third-quarter period, and profitability fell hard even on an adjusted basis.
Management cited a challenging selling environment that includes weaker advertising spending and slower e-commerce sales. Adjusted pre-tax earnings fell 62% to $77 million from over $200 million in late 2021.
On the plus side, Pinterest has plenty of cash on the books today and still generates strong free cash flow. These factors make it less likely that it will have to pivot to drastic cuts or restructuring if a recession develops in the next few quarters.
Looking ahead
Pinterest executives say they already started efforts aimed at boosting profitability by 2023. Sales growth will remain in positive territory in the meantime, with revenue likely rising in the mid-single digits in the fourth quarter. Management predicts profitability will fall again in the period, though.
The company's focus today is on making the platform more attractive both to its users and to advertisers, for example by tweaking ad presentations and adding more purchasing options. "We are deepening our monetization per user," Ready said, "and building personalized and relevant experiences that go from inspiration and intent to action."
In that way, this current demand slowdown might end up doing some good for the business if it spurs Pinterest to create a stickier, more effective browsing and shopping experience. That improvement might supercharge sales and earnings once user growth reaccelerates.
There's no predicting the timing of such a rebound. And Pinterest's weak short-term earnings outlook makes it riskier than other tech stocks that are consistently profitable. As a result, investors might want to keep this stock on their watchlist right now until they see more concrete signs of improving profit margins.
