Pinterest's (PINS -0.19%) stock chart will look familiar to any investor in tech stocks or social media stocks.

Like its peers, Pinterest shares boomed during the pandemic as lockdowns drove a surge of interest in the platform, and its user base and advertising revenue soared. 

However, the economic reopening has been rough on the image-based discovery engine as its user base declined for several quarters, and revenue growth has slowed sharply due to macroeconomic headwinds and Apple's ad tracking changes.

The stock is now down about two thirds from its pandemic-era peak, but is the sell-off a buying opportunity? Here's where Pinterest stands today.

Person looking at Pinterest on a tablet.

Image source: Pinterest.

A social media sleeper

Pinterest's most recent earnings report isn't going to turn any heads. In a challenging environment for digital ad stocks, revenue grew just 8%, or 10% in constant currency, to $684.5 million, and adjusted EBITDA fell by 62% to $77.3 million as the company ramped up spending to drive future growth.

Guidance wasn't particularly encouraging either. Management called for mid-single-digit revenue growth, and it expected adjusted operating income to decline again in the fourth quarter.

However, there were some promising signs in the report. Its user base returned to growth on a year-over-year basis with monthly active users inching up from 444 million to 445 million, while sequential growth was even more impressive, up 3% from 433 million monthly active users (MAUs) in the second quarter. The company continued to grow average revenue per user (ARPU) as well. It increased 11% globally to $1.56, and 15% in North America, its most important market, to $6.13. 

Though its financial growth may be momentarily impeded by macro headwinds, the company continues to improve its product both for users and advertisers. It tripled video content, and forged a new music partnership with Warner Music Group and others to expand the music experience on the platform. It also launched the popular Shuffles app, a social media interactive collage tool that allows users to share visual content in a creative way.

Why the worst could be over for Pinterest

With its user base returning to growth, including in North America, where the company said that users grew sequentially for the first time since the first quarter of 2021, Pinterest seems to have safely returned to steady user growth. It's seen an especially strong influx of users from Gen Z. It's also worth noting that even though Pinterest's revenue growth has slowed, it was still faster than peers like Meta Platorms, Snap, and even Alphabet in the third quarter.

On the earnings call, CEO Bill Ready said the return to user growth meant that the company "had largely lapped the headwinds from the pandemic unwind." 

The stock has increased by more than 60% since it bottomed out in May, and has even gained the attention of activist investor Elliott Management, which recently formed a long-term partnership with Pinterest, including gaining a board seat.

Additionally, advertising is a cyclical industry, and ad demand should accelerate once the economy recovers. Wall Street expects as much, calling for revenue growth to improve from 9% this year to 15% next year, and the trends in user growth and ARPU should support that. Advertisers also like Pinterest, as many of its users come to the platform with purchase intent, meaning a lot of them want to see ads. The visual nature of Pinterest also lends itself well to ads.

Is Pinterest stock a buy?

Pinterest has another advantage over most growth stocks. The company is profitable, at least on an adjusted basis, having posted an adjusted EBITDA of $246 million through the first three quarters of the year. Based on analyst expectations of adjusted earnings per share of $0.61, the stock trades at a price-to-earnings ratio of just over 40, which seems like a very reasonable price to pay for a stock with the growth potential of Pinterest.

While we don't know when the digital ad market will recover, it will bounce back eventually. Pinterest looks poised to see revenue growth accelerate given the rebound in its user base, improvement of its ad product, and the unique features of its platform.

At its current price, the social media stock looks like a smart buy heading into 2023.