Shares of social media platform Pinterest (PINS -0.19%) have been fighting their way back from lows but remain more than 70% below their all-time high.
Most recently, the stock has declined following the release of its fourth-quarter earnings report as revenue fell short of analysts' estimates. Though Pinterest showed some encouraging signs in the report, it's increasingly hard to label the company a growth stock.
Here's why investors should temper any expectations around a near-term rebound for the stock.
There's a vast monetization opportunity
You've probably heard the expression that a picture can say a thousand words. Pinterest has built a business around that idea -- the company's social media platform functions like a visual search engine, allowing users to post (pin) linked pictures to inspire others. You can search Pinterest for recipes, fashion, decorating ideas, and more.
Pinterest makes money through advertising, like many other audience-centric businesses. Users can pay to promote pins, moving themselves to the top of search results. As a visual platform, the potential for Pinterest as a shopping tool has teased investors since the company went public. Below, you can see how much revenue different markets generate for the company.
Image source: Pinterest
Users in the United States and Canada represent most of the revenue Pinterest gets out of users. The average user in this geography generates $7.60 in revenue versus just $1.01 in Europe and $0.14 for the rest of the world.
Consider that Meta Platforms generates $10.86 in revenue per worldwide user, dwarfing the $1.96 reported for global Pinterest users. Hypothetically, monetizing users better could fuel a ton of revenue growth for Pinterest over the coming years. This potential is what makes the stock so tempting. However, potential means nothing unless it's realized, which is where key concerns regarding this business come in.
Can management tap Pinterest's potential?
Pinterest only grew global revenue per user 1% year over year last quarter, but advertising companies have experienced a widespread downturn in recent months, so that's understandable. The company's stagnating user growth in the United States and Canada is more concerning. The region's user count didn't grow in 2022, remaining flat at 95 million.
Market saturation doesn't seem like a good excuse, because Meta grew Facebook's monthly active user counts from 263 million to 266 million in 2022 in the same market. Management at Pinterest did tout strong engagement from Gen Z users, meaning those born since the late-mid 1990s, a core advertising demographic. Average revenue per user also grow 6% year over year in the U.S. and Canada, but that might not cut it without user growth too.
Image source: Pinterest.
Pinterest is growing in other markets. The rest of world segment grew users to 231 million, and that segment generated 21% more revenue per user year over year. But Pinterest's top line grew just 4% in the fourth quarter, because non-U.S. and Canadian users still generate a relatively small amount of revenue. The lesson? Pinterest needs its core user markets to continue expanding. Otherwise, it's hard to move the needle.
Time to buy?
The stock's valuation has fluctuated with its revenue growth over the past few years. Today, shares trade at a price-to-sales ratio (P/S) of almost six, near its valuation at the onset of the pandemic. Pinterest's low-single-digit revenue growth in 2022 could create some easy comparisons for 2023, so even a modest uptick in performance could boost the stock.
Data by YCharts.
But Pinterest needs to show more progress, and do it consistently, to be an excellent long-term investment. There are too many ifs to make me comfortable with the stock today. Investors should look for user growth to return to the U.S. and Canada as a potential catalyst for the growth the stock needs to regain its momentum.
