What happened

Shares of image-browsing platform Pinterest (PINS -0.64%) were punished on Friday after the company reported financial results for the first quarter of 2023. At 11:45 a.m. ET, Pinterest stock was down 18%.

So what

In Q1, Pinterest had 463 million monthly active users (MAUs), the second-highest number that the company has ever seen during a quarter -- only the first quarter of 2021 was better. With 463 million, the company's MAUs were up 7% year over year, leading to 5% revenue growth.

Pinterest generates revenue from ads. And with users growing faster than revenue, it's obvious that ad rates were down for the company in Q1, as they were for other advertising technology companies. However, in Pinterest's case, it continues spending money to invest in its technology. And with ad rates falling, it's getting less profitable, which is upsetting the market as well today.

In Q1, Pinterest's gross margin fell from 75% in the prior-year period to 72% now. Moreover, the company's loss from operations increased dramatically to $244 million, compared to only a $4 million loss in the same quarter of last year. 

Now what

Last quarter, Pinterest's revenue was up 4% year over year, and it was up 5% in Q1. That's right about the level of growth that management expects for the upcoming second quarter. However, management also said it expects its expenses to grow at a double-digit pace, outpacing revenue growth. This implies greater losses in Q2 than in Q1. 

It's discouraging for Pinterest shareholders. On one hand, the platform shows immense promise. Many believe its inspiring image-browsing platform can make it a superior platform for advertisers. And the company continues to bolster its capabilities. For example, Amazon will now be promoting products from its ad network on Pinterest, this being the first time Pinterest will allow third-party ads -- a promising development.

That said, Pinterest isn't making progress on profitability at the moment. And growth is lackluster. Therefore, this stock will likely fail to beat the market until one or both of these factors improve.