Pinterest (PINS 0.89%) is a bit of an anomaly compared to typical social media companies. It's not meant as a news feed but rather a collection of images and videos to serve as ideas and inspiration. Because people often go to Pinterest looking for inspiration, the platform is prime advertising real estate.
But Pinterest doesn't make nearly as much average revenue per user (ARPU) relative to its peers. This gives the business immense growth potential, but the stock has fallen with the broad market, shedding 37% this year and down almost 75% from its all-time high. So are investors looking at a potential multibagger?
Pinterest's ARPU metric has a long way to go before reaching its peer level
The Pinterest investment thesis hinges on ARPU growth, because user growth has been nonexistent over the past year.
| Period | Monthly Active Users | YOY Growth (Decline) |
|---|---|---|
| Q3 2021 | 444 million | 1% |
| Q4 2021 | 431 million | (6%) |
| Q1 2022 | 433 million | (9%) |
| Q2 2022 | 433 million | (5%) |
| Q3 2022 | 445 million | 0% |
Data source: Pinterest. YOY: year over year.
With the company hitting a ceiling with its user base, it needs to do a better job at monetizing it, and Pinterest has made progress on this front.
| Region | ARPU (Q3 2022) | YOY Growth |
|---|---|---|
| Overall | $1.56 | 11% |
| U.S. & Canada | $6.13 | 15% |
| Europe | $0.72 | (3%) |
| Rest of world | $0.11 | 38% |
Data source: Pinterest.
With Pinterest's user base stabilizing and the company squeezing more out of each user, the business is moving in the right direction again. But compared to Snap's North American ARPU of $8.13 in in the third quarter and Meta Platform's ARPU of $49.13, it isn't close to reaching the same level of monetization as its peers.
This isn't all bad for investors since it means Pinterest has a significant growth runway. It will also need a lot more revenue to offset its rising expenses.
The new CEO has a plan
Over the past year, Pinterest's expenses have exploded, outpacing top-line growth in every category.
| Expense | % of Revenue (Q3 2021) | % of Revenue (Q3 2022) |
|---|---|---|
| Cost of revenue | 20.0% | 26.7% |
| Research and development | 29.4% | 37.2% |
| Sales and marketing | 24.7% | 33.6% |
| General and administrative | 10.4% | 12.7% |
Data source: Pinterest.
With gross and operating margins ticking down, that's a bad sign for investors. And the rising expenses resulted in Pinterest reporting a loss of $65 million in the third quarter versus the $94 million profit it reported in the prior-year period.
However, Pinterest has a new CEO who could help right the ship. Bill Ready was hired on June 29, so the third quarter was his first full quarter with the company. It also didn't give him much time to make changes -- investors should give him at least a year to see how his vision works out.
In the third-quarter earnings call, Ready noted three main areas he is focused on improving. First, he wants to make Pinterest and the search results more relevant to its users. Video is just one way he believes Pinterest can make searches more relevant, and management believes it resonates well with a younger audience. Second, the platform has immense potential to improve its shopping experience, and Ready wants to make all pins shoppable. And third, he wants Pinterest to get better at sending potential customers to advertisers' websites. If Pinterest does this, it can charge a premium for its ads, further increasing its ARPU.
A platform transformation often comes with higher spending, so investors will have to be patient as Pinterest's profitability takes a hit in the near term.
But Pinterest is still valued at a premium compared to its social media peers.
Data by YCharts.
This premium reflects the optimism investors have around the platform's transformation, but it also brings considerable risk, as disappointing results would cause the stock to fall even further.
So should you buy Pinterest stock? If you believe in Bill Ready and his plan, you can take advantage of Pinterest stock's underperformance this year and pick up shares at a discount. But personally, there aren't enough metrics trending in the right direction for me to give the company a glowing endorsement. Investors should proceed with caution, since the business is at a tipping point.
