A significant reason many investors have avoided Pinterest (PINS -0.52%) over the past year was that the user base was shrinking -- terrible for a young growth company. However, its third-quarter 2022 earnings report displayed evidence that the worst for Pinterest was over, with user growth returning.
Moreover, some now see a considerable upside once the economy improves. So the question for investors is, should you buy or avoid the stock, considering the lingering poor economic environment?
Suppose you have a long-term mindset; now might be the time to buy Pinterest, a stock down significantly from its all-time high. Here's why.
Pinterest ads are very effective
Many call Pinterest a social media company when it's more of a visual discovery engine for finding ideas. As a result, people use the platform differently from other social media websites, and its advertising is a unique animal.
People go to platforms like Meta Platform's Facebook and Instagram, Snap's Snapchat, or TikTok to connect with people and share pictures or entertaining videos. But many people find the ads on most social media websites distracting, making them less effective. On the other hand, many people come to Pinterest to search for purchasing ideas with the intent to buy, and users react to its ads differently.
Pinterest ads come in the form of what the company calls Pins. Each advertiser pays for placement in areas where people are likely to see them -- the targeted user's home feeds and search results. Since many people on the service are organically searching for Pins, ads are less intrusive, and advertisers see more favorable responses. For instance, statistics show that shoppers on Pinterest spend 80% more than users on other platforms and have a 40% bigger basket size. Pinterest, by 2.3 times over, also has a more efficient cost per conversion than ads on other social media sites, with two times higher return on ad spends for retail brands. These statistics mean Pinterest ads cost less while being more effective.
Many advertisers also favor Pinterest because it can effectively address different types of ad campaigns throughout the sales process. For example, it can run brand awareness campaigns, drive consumers researching products to an advertiser's website, and can guide buying decisions. This wide versatility to address different advertiser needs provides a meaningful opportunity to grow its market share within the $600 billion-plis digital advertising market.
Built to rebound from a terrible macroenvironment
Pinterest has spent this down market doing more than just idly sitting around. Instead, Pinterest spent 2022 investing heavily in initiatives that drive sustainable, long-term growth.
One initiative includes increasing customer engagement, which it accomplishes by expanding and improving the platform's picture and video content. Another growth strategy creates more relevant user experiences, especially for Generation Z, by using machine learning to find and recommend more relevant content for users.
Management attributes its return to seasonal sequential growth in global and U.S. users in the third quarter of 2022 to these growth initiatives. In addition, it's gaining traction with Generation Z, with growth accelerating from the second quarter and showing double-digit year-over-year growth. So the company has set itself up for future user growth, especially as the economy rebounds. Furthermore, it plans to return to significant margin expansion next year and has already started to rationalize costs.
Last, despite the economic downturn, it still grew revenue by 8% in the third quarter, has a strong balance sheet with roughly $2.7 billion in cash and no long-term debt, and continues to generate strong free cash flow. Management crafted this company to survive a downturn while producing solid revenue growth and profitability.
One word of caution
The Wall Street Journal reported that Meta now faces enormous fines for violating Europe's General Data Protection Regulation (GDPR) privacy law. Moreover, the EU could force Facebook and Instagram to change their terms of service that require users to accept ads based on their digital activity. While it's unknown how this news affects Pinterest today, an adverse ruling could eventually negatively affect how investors value Pinterest -- a risk you must keep in mind.
Nevertheless, despite a shrinking user base during the pandemic recovery period, Pinterest grew revenue -- a sign that the platform is attractive to advertisers and can monetize users faster than user growth. Now that the company appears to be on the verge of growing users again, it might be an excellent time for long-term growth investors to pick up a few shares. This is a solid consideration since Pinterest sells at a price-to-sales of 5.9, close to its low as a public company.
