Pinterest's (PINS -1.55%) stock price dropped 5% on Feb. 7 following its fourth-quarter earnings report. The social media company's revenue rose 4% year over year to $877 million but missed analysts' estimates by nearly $10 million. Its adjusted net income fell 40% to $203 million, or $0.29 per share, which still cleared the consensus forecast by a penny.
For the full year, Pinterest's revenue increased 9% to $2.8 billion as its adjusted net income dropped 45% to $426 million. Those numbers compared poorly against its 52% revenue growth and 175% adjusted net income growth in 2021, but that slowdown wasn't surprising given the tough macroeconomic conditions for advertising platforms over the past year.
Image source: Pinterest.
Should investors accumulate more shares of Pinterest before those headwinds wane? Let's review Pinterest's biggest near-term challenges, its progress toward stabilizing its business, and its valuations to decide.
What happened to Pinterest?
Prior to the pandemic, Pinterest had carved out a niche in the crowded social media market with its virtual pinboards, which allow its users to share their interests, ideas, and hobbies with each other. Its visual approach made it a natural fit for retailers, many of whom uploaded their entire catalogs to Pinterest as shoppable pins, and it was well insulated from the controversies that plagued other social platforms like Meta Platforms' Facebook and Twitter.
During the pandemic, Pinterest's growth accelerated significantly as more people used its pinboards to find fresh ideas for online shopping, recipes, DIY projects, and other stay-at-home activities. But as the lockdowns ended, Pinterest's growth cooled off as people started to go out again. Tough competition from ByteDance's TikTok and Meta Platforms' Instagram, along with intensifying macro headwinds for online ads, exacerbated that slowdown.
Is Pinterest's business finally stabilizing?
Pinterest's total number of monthly active users (MAUs) hit a peak of 478 million in the first quarter of 2021. But by the end of 2021, that figure had dropped to 431 million, which suggested to the bears that Pinterest was merely a pandemic-era fad that would eventually fade away. But over the past year, Pinterest's MAUs stabilized and improved as its rising international MAUs offset the flat growth of its MAUs in the U.S. and Canada. It ended the fourth quarter with 450 million MAUs, which represented 4% growth from a year earlier and 1% growth from the third quarter.
However, Pinterest's 95 million MAUs in the U.S. and Canada still generated 82% of its revenue for the full year despite only accounting for 21% of its total MAUs. As a result, Pinterest is relying more heavily on its lower-revenue international users to buoy its top-line growth as it struggles to gain new high-revenue users across the U.S. and Canada.
On the bright side, Pinterest's average revenue per user (ARPU) in the U.S. and Canada still rose 16% to $24.38 in 2022, which indicates it's still squeezing out more revenue from its existing users with more sponsored and shoppable pins. By comparison, its ARPU in Europe increased 7% to $3.23, while its ARPU in the "Rest of World" segment rose 49% to $0.43.
Therefore, Pinterest's top-line growth should eventually stabilize as long as it continues to gain more MAUs, grows its ARPU in the U.S. and Canada, and monetizes its international MAUs more aggressively. For the first quarter of 2023, it expects its revenue to rise by "low single digits" year over year. Analysts expect its revenue to rise 8% to $3.04 billion for the full year.
But what about its declining margins?
Pinterest's core business is still growing, but its margins are under pressure. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin was halved from 32% in 2021 to 16% in 2022, mainly due to higher marketing expenses (including creator reward programs) and infrastructure costs.
Pinterest plans to rein in its expenses with layoffs (which will impact nearly 5% of its workforce), more moderate marketing expenses, and tighter infrastructure spending this year. Analysts expect its adjusted EBITDA to rise 19% to $528 million in 2023 and boost its adjusted EBITDA margin by a percentage point to 17%. It also authorized a new $500 million buyback plan for the next 12 months, but those repurchases will mainly offset the dilution from the stock-based compensation expenses (which consumed 18% of its revenue in 2022) instead of meaningfully boosting its earnings per share.
Is Pinterest's stock too cheap to ignore?
With an enterprise value of $15 billion, Pinterest stock trades at 29 times this year's adjusted EBITDA. Meta Platforms, which is much larger and better diversified than Pinterest, trades at just 8 times this year's adjusted EBITDA.
Therefore, I don't think Pinterest -- which remains nearly 40% above its initial public offering price -- is a screaming bargain yet. Its prospects are improving, but it still hasn't proven that it can last 12 rounds against Instagram, TikTok, and other evolving social media giants. It also hasn't proven that it can unlock the long-term growth potential of the "social commerce" market yet. Investors should probably stick with other more promising tech stocks until Pinterest resolves those issues.
