Is Pinterest Stock a Buy Now?

Pinterest's (PINS -0.52%) stock plunged 16% on April 28 after the social media company posted its first-quarter earnings report. Its revenue rose 5% year over year to $603 million and beat analysts' estimates by $9 million. Its adjusted earnings dipped 20% to $0.08 per share, but still cleared the consensus forecast by $0.06.

Those headline numbers weren't too bad, but Pinterest disappointed investors with its lackluster guidance for the second quarter. It says it expects revenue to rise "roughly in-line" with its growth from the previous two quarters -- which implies its revenue will only grow by the mid single digits year over year -- but that its adjusted operating expenses would still increase by the "low teens" on a sequential basis.

Image source: Pinterest.

That mix of sluggish growth and rising expenses drove investors away from the stock, which remains nearly 75% below its all-time high from February 2021. Should investors take the contrarian view and buy the stock anyway?

The post-pandemic slowdown continues

Pinterest experienced a major growth spurt during the pandemic as more people stayed at home and searched for recipes, family activities, DIY projects, and online shopping ideas on its pinboards. Its revenue surged 48% in 2020, and the platform reached a peak of 478 million monthly active users (MAUs) in the first quarter of 2021.

But that growth set it up for tough year-over-year comparisons after the pandemic ended. Its revenue still rose 52% in 2021, but its growth cooled off in the second half, and it ended the year with only 431 million MAUs.

The bulls claimed that slowdown was temporary, and that it could continue to expand its ecosystem with more social shopping features (like shoppable pins and integrated payments) and short videos. The bears argued that Pinterest was just a pandemic-era fad that would struggle to keep pace with Meta's (META -0.52%) Instagram and ByteDance's TikTok.

Pinterest seemed to prove the bears right with just 9% revenue growth in 2022. But the bulls will point out that its total MAUs still rose 4% to 450 million, and its average revenue per user (ARPU) grew 10%.

Did things get better in the first quarter?

In the first quarter of 2023, its MAUs rose 7% year over year to 463 million, but its ARPU dipped 1%. That marked its first ARPU decline since the second quarter of 2020, when its ad sales were severely disrupted by the onset of the pandemic.

Data source: Pinterest.

Pinterest's accelerating MAU growth is encouraging, but that was mainly driven by its overseas users, who generate much lower ARPU than its users in the U.S. and Canada. Its MAUs in the U.S. and Canada only grew 1% year over year to 95 million in the first quarter, yet they still accounted for 81% of its revenue. Unless Pinterest aggressively monetizes its overseas users with more ads and features, its anemic ARPU growth will keep offsetting its stable MAU growth.

But closing that gap could take a long time. In the first quarter, its MAUs in the U.S. and Canada still generated nearly seven times as much ARPU than its European MAUs and 51 times as much ARPU than its users across the rest of the world.

Pinterest's tepid guidance for the second quarter suggests that pressure will persist, and analysts expect its revenue to only rise 7% to $3 billion this year. By comparison, analysts expect Meta's revenue to grow 8% to $125.7 billion this year.

Its margins are still shrinking

Pinterest's margin for adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) expanded from 18% in 2020 to 32% in 2021, but shrank to 16% in 2022 and just 4% in the first quarter of 2023 -- even after it executed two rounds of layoffs and implemented other cost-cutting.

Pinterest insists it can still expand its margins, but it also expects to improve its monetization of overseas users, expand its social-shopping features, and gain more Gen Z users -- who have now become the platform's fastest-growing demographic. It's unclear how Pinterest will spin all those plates without compressing its margins, and its guidance for a sequential increase in operating expenses for the second quarter suggests its margins might shrink even more before they finally stabilize.

Therefore, Pinterest could struggle to meet analysts' expectations for an adjusted EBITDA margin of 17% and 26% adjusted earnings growth for the full year. Based on those forecasts, which could change on a dime, Pinterest's stock still looks pricey at 41 times forward earnings. Meta, which is expected to grow its EPS by 25% this year, has a forward multiple of 24.

There's no compelling reason to buy Pinterest

Pinterest faces too many near-term challenges to be considered a turnaround play. It might continue to grow in its niche of the social media market, but its unbalanced growth, declining margins, and high valuations make it a very risky investment.