On Feb. 6, image-browsing platform Pinterest (PINS -1.52%) reported financial results for the fourth quarter of 2022, showing modest revenue growth and meager net income. But there's more to a quarterly financial report than this. For Pinterest, its quarterly report included a $500 million share repurchase plan.
With a market capitalization of under $18 billion, a $500 million buyback is substantial for Pinterest. And for many companies, a buyback of this size would be a big boost for earnings per share -- one of the biggest drivers of long-term stock performance. But for Pinterest, it's unlikely to help shares go up. Here's why.
Mitigating a $500 million problem
Pinterest's management is forthright about why it's using $500 million to repurchase shares. In the conference call to discuss Q4 results, new CEO Bill Ready said: "[W]e're planning to execute a stock buyback program of up to $500 million, which we plan to commence this quarter to help mitigate dilution from stock-based compensation."
Many companies, and especially tech companies, compensate workers with shares of the company. In theory, there are benefits to stock-based compensation. First, companies that are low on cash can still attract important people by sweetening job offers with stock. Second, employees who are also shareholders are aligned with the concerns of common shareholders.
Therefore, it would be too strong to say that stock-based compensation is 100% bad. However, there are drawbacks to stock-based compensation as well. The biggest issue for shareholders is that it can dilute shareholder value. Companies, including Pinterest, typically issue new shares to compensate employees. And with more shares outstanding, each share is a little less valuable.
Stock-based compensation is common. However, Pinterest's use of this tool has accelerated substantially over the past 2.5 years.
PINS Stock Based Compensation (TTM) data by YCharts
As the chart above shows, Pinterest's stock-based compensation expense in 2022 was $497 million. Therefore, buying back $500 million in stock will merely offset the stock it just issued to employees.
Looking forward, Pinterest has $1.3 billion of still-unrecognized share-based compensation expenses, according to filings with the Securities and Exchange Commission. These are expected to be recognized over the next 2.9 years. Therefore, assuming an even rate of recognition, Pinterest will have almost $450 million annually in this expense from here.
In short, Pinterest's share authorization plan isn't a boost to the upside. It's a mitigation plan from the downside brought on from diluting shareholders.
The bigger problem
As a shareholder myself, Pinterest's stock-based compensation doesn't necessarily concern me. But the larger context does.
Stock-based compensation is an operating expense. And including stock-based compensation, Pinterest had $2.2 billion in total operating expenses in 2022. That was a 29% year-over-year increase from its operating expenses of $1.7 billion in 2021. However, the company's revenue was up less than 9% during this time.
Looking ahead to the first quarter of 2023, Pinterest's management believes its revenue will only grow by a low single-digit percentage.
The problem: Spending more on operating expenses isn't leading to more revenue growth for Pinterest.
Moreover, Pinterest's largest operating expense increase in 2022 came from sales and marketing, up almost 46% year over year. If any operating expense should lead directly to growth, it's sales and marketing. But it didn't for Pinterest. To me, that's the more concerning issue.
Pinterest's new management is promising "operational rigor" in 2023, which could lead to profit improvements. Shareholders like me hope that's the case.
Pinterest generates its revenue from advertising, and advertising is currently in a slowdown because of the economy. Therefore, top-line growth is lacking right now.
Absent of revenue growth, profit growth is the next best thing. Hopefully this is something Pinterest can improve in the coming year.
