Image-browsing platform Pinterest (PINS 0.21%) has two main ways to grow its revenue: attract more users and make more money per user. One of these growth levers was already challenged. And recent financial results from Meta Platforms (META -1.12%) and Snap (SNAP 4.71%) cast serious doubt on the other.
The U.S. ad market is the most important part of Pinterest's business right now. And that's where headwinds are blowing the hardest.
Pinterest's challenged user metrics
Global monthly active users for Pinterest peaked back in the first quarter of 2021 at 478 million. Coincidentally, that's the same quarter that Pinterest stock peaked at almost $90 per share.
In its most recent quarter, the third quarter of 2022, Pinterest was down to 445 million global monthly active users -- a 7% drop from its peak 1.5 years prior.
Now, it's important to caveat Pinterest's user metrics. The company isn't counting total accounts. Rather it's counting a user who had activity on the platform during a 30-day period. In theory, a Pinterest user could still have the app on their phone and be happy with the platform. But if they don't do anything during the month, they're removed from the active user count.
In reality, there are plenty of reasons a Pinterest user could take a break. People often use the platform to get inspiration for a project. Once the project is complete, they may not browse images on the platform until they have a new need.
However, whatever the reason, the problem remains. Pinterest generates revenue when users are shown an ad. And if they aren't browsing images on the platform, the company isn't making money.
The trend right now
With a 7% drop in active users, some people are surprised to learn that Pinterest's revenue has continue climbing nonetheless, as the chart below shows.
PINS Revenue (TTM) data by YCharts
Pinterest is still growing revenue because its average revenue per user (ARPU) has continued climbing. In Q1 2021, the company's quarterly global ARPU was just $1.04. In Q3 2022, quarterly global ARPU was up to $1.56 -- a 50% improvement.
Pinterest is scheduled to report financial results for the fourth quarter of 2022 on Feb. 6. And there's good reason to believe its ARPU could take a hit.
Meta Platforms and Snap have similar business models to Pinterest -- they both generate revenue from ads as well. And both of these companies have already reported financial results this earnings season.
In the fourth quarter of 2022, the average price per ad dropped 22% year over year for Meta Platforms. Similarly, eCPM (effective cost per mille, or thousand ad impressions) for Snap dropped 9% year over year during its fourth quarter.
The similarity between Meta Platforms' results and those of Snap suggests this is a broad trend in the digital advertising space. And that forebodes trouble for Pinterest. Moreover, there's an additional reason the trend is particularly troubling.
Both Meta Platforms and Snap saw overall growth in ad impressions. But growth came from international markets. Management for Meta said its Asia-Pacific and Rest-of-World geographies were strong and led to an overall 23% increase in ad impressions. This increase offset decreases in ad impressions in the better monetized U.S. region.
For its part, Snap's ad impressions were up 8% overall. But ARPU in North America fell a whopping 9% year over year. In other words, both Meta and Snap saw ad impression growth in low monetization regions whereas monetization dropped in the U.S.
That's a problem for Pinterest. In Q3, 84% of the company's revenue came from the U.S. and Canada. By comparison, only 68% of Snap's Q4 revenue was from North America. And only 48% of Meta Platforms' Q4 ad revenue came from the U.S. and Canada.
To summarize, financial results were lackluster for Meta Platforms and Snap because of weakness in the U.S. ad market. But both of these companies were able to mitigate this weakness by strength in international markets.
However, Pinterest relies more on the U.S. than Meta Platforms and Snap do. And therefore, Pinterest's revenue could be harder hit when it reports Q4 results. Unless the company is able to offset weakness in the U.S. with growth internationally, it could be a rough day when it reports financial results.
If there's any silver lining, it's that the slowdown in advertising is due to the economy, not a problem with Pinterest. In time the ad market should rebound. But Pinterest shareholders may want to brace themselves for a tough start to 2023.
