Pinterest (PINS 1.02%) shares have been on quite the roller-coaster ride in recent years. Since the company went public in April 2019, the stock has risen as much as 265% at its all-time high. But from February 2021, the shares have fallen a sobering 73%. That downward spiral isn't too surprising, given that many unprofitable growth tech stocks have fallen way out of favor with investors as a new economic reality sets in.
Does this make Pinterest a beaten-down stock to buy now? Let's take a closer look at this social media company.
Management disappointed shareholders
During the first quarter of 2023, ended March 31, Pinterest reported revenue of $603 million, representing 5% year-over-year growth. The number of monthly active users (MAUs) totaled 463 million at the end of the quarter, up 7% from Q1 2022. Both of these key metrics were better than what Wall Street analysts were looking for, even though Pinterest posted a diluted earnings per share loss of $0.31 in the quarter.
Pinterest recently announced plans to partner with e-commerce juggernaut Amazon, bringing more ad content onto the company's platform. The goal is to make Pinterest even more shoppable, and management believes the partnership will only improve how well Pinterest will be able to serve its user base. This will be implemented over multiple quarters, with analysts believing that the revenue impact for Pinterest may take some time.
Looking ahead, the management team expects the current quarter's sales growth to resemble that of the past two quarters. That means low-single-digit gains are what shareholders should look for.
"The ads market continues to be uncertain given the macroeconomic environment," CFO Todd Morgenfeld said on the Q1 2023 earnings call. If many executives are planning for a recession to happen, marketing and advertising spending will usually be among the first expense items to be cut. And Pinterest is feeling this firsthand.
Investors weren't pleased with this guidance as the stock cratered more than 20% following the news. But what's encouraging is that other businesses that derive most of their sales from digital ads, like Alphabet and Meta Platforms, are also seeing revenue growth slow dramatically. This trend could help to ease Pinterest shareholder worries.
Looking at the bigger picture
Pinterest's weaker-than-expected guidance certainly can raise pessimism surrounding the business, especially when investors are hoping for growth to bounce back significantly. But by zooming out, we can gain a better perspective about the business that isn't possible by just focusing on a single quarter. With this framework, there are some important reasons to be bullish on the stock.
For starters, Pinterest has done a great job expanding its user base. Over the past four years, MAU numbers have increased by 59%. And growth has actually accelerated in recent quarters. Moreover, while Pinterest's average revenue per user (ARPU) fell 1% in the most recent quarter, it's up 81% since the first quarter of 2019. There's also a ton of opportunity for the business to better monetize its international MAU numbers in the decade ahead, perhaps even getting ARPU to close the gap with the lucrative U.S. and Canada region.
Investors can also appreciate Pinterest's solid financial position. As of March 31, the company had $2.7 billion in liquidity on its balance sheet, with no debt. That places the business in a good position, particularly at a time when interest rates have been going higher.
Shares are up 17% over the past 12 months, but they're still well off their peak price. The stock currently trades at a price-to-sales (P/S) multiple of 5.7. That valuation is substantially below Pinterest's historical average P/S ratio of 12.7, creating a potentially attractive buying window.
In the meantime, though, investors have to deal with near-term uncertainty as the economic picture remains cloudy. In addition, Pinterest has not yet proven it can be profitable on a consistent basis; it posted an operating loss of $244 million last quarter. But for those who can look past these challenges and instead focus on the positive traits, Pinterest looks like a solid buy right now.
