Without a doubt, some of the most popular growth tech shares got absolutely hammered when inflation started rearing its ugly head in 2021. Pinterest (PINS -0.50%) was among these stocks. With investors refocusing on companies' bottom lines, it made sense that those businesses perceived as "safer" have become more popular recently.
But now, Pinterest shares are down an eye-watering 68% from their 2021 peak, and that's despite rising an impressive 29% over the past 12 months (a lot better than the Nasdaq Composite's 9% drop). Does this renewed market optimism mean it's time to buy the stock now?
Image source: Getty Images.
Dealing with macro headwinds
It's hard to overstate the positive impact the pandemic had on companies that derive their revenue primarily from digital advertising. Social media enterprises in particular -- like Meta Platforms, Snap, and Pinterest -- saw revenue surge in late 2020 and early 2021. However, with the central bank aggressively hiking interest rates last year to fight inflation, the threat of a recession has caused things to cool down quite a bit.
During the last three months of 2022, Pinterest's revenue rose just 3.6% year over year to $877 million. This muted growth in the most recent quarter was the sixth straight period that sales decelerated. Given that the ad market is cyclical, with spending under pressure when expectations of a downturn are elevated, Pinterest's tepid performance is understandable in this environment.
Making matters worse was that the business posted a net loss of $96 million last year, after generating its first fully profitable fiscal year as a public company in 2021. Far higher spending on research and development and sales and marketing was to blame.
"While 2022 started off as an investment year, we took steps to cut down on costs in this challenging macroeconomic environment starting in early Q3, and we are continuing to find ways to reduce our expenses," CEO Bill Ready said on the fourth-quarter 2022 earnings call. That's the right approach.
It wasn't all bad news, though. Pinterest ended 2022 with 450 million monthly active users (MAUs), up from 431 million a year earlier. And its average revenue per user (ARPU) rose 1% year over year in Q4. Even the almighty Facebook app, which is known for its global dominance, couldn't match this result. Its ARPU declined 6% in the fourth quarter.
One of management's key objectives is to continue finding ways to better monetize the user base, something shareholders should like to see. By improving engagement through serving more relevant and personalized content, coupled with the ongoing development of new ad technology, the leadership team's goal is certainly possible.
Looking at the bigger picture
It's easy to fixate on the latest quarterly or yearly financial results, especially at a time when there seems to be a lot of uncertainty about the economy in the near term. But since we like to think more about the long term at The Motley Fool, it's important to keep this kind of perspective with the stocks you own.
Pinterest operates in the massive (and growing) global digital advertising market, estimated to be valued at more than $600 billion today, with the projection that it'll be worth $1.5 trillion by 2030. The other promising development is the company's international operations. Pinterest's MAUs outside of the U.S., Canada, and Europe surged 8% in the fourth quarter. And ARPU for this geography soared 21%. As a result, there looks to be a meaningful expansionary runway outside of the most developed markets.
What's more, Pinterest's strong balance sheet, which has $2.7 billion combined of cash, cash equivalents, and marketable securities, with no debt, puts it in an advantageous spot to benefit from what appears to be a sizable long-term growth opportunity.
As of this writing, the stock sells at a price-to-sales multiple of 6.8, well below its historical average of nearly 13. That's an attractive valuation. And if investors like to follow the moves of more prominent capital allocators, it's worth noting that Cathie Wood's investment firm purchased more than 150,000 shares in Pinterest about a month ago. This could further encourage some investors to buy the stock.
