Pinterest (PINS -0.74%) could see revenue reaccelerate sooner than expected thanks to a smart move the tech company made earlier this year.
In April, the image-based social media platform disappointed investors with an outlook that called for relatively slow revenue growth in the second quarter. That same day, however, it announced a partnership with Amazon to display third-party ads on its platform. The partnership offers several benefits, including more inventory and better targeting than Pinterest's first-party data could allow.
And Pinterest seemingly put that partnership to work. The result could be better-than-expected revenue growth, leading to strong stock performance for investors.
More and more relevant
Pinterest is showing a lot more ads to its users than just a couple of months ago, and it could mean a significant increase in ad revenue.
Analysts at RBC Capital Markets found an increase in ad load in top categories from 27% to 30% in the last two months. That is to say, many Pinterest users are seeing about 10% more ads.
Increased ad load is a very positive sign for investors. It signals that Pinterest is seeing strong demand for ads from marketers. It also indicates that users find the additional ads relevant enough that any impact on pricing is offset by the increased ad impressions.
It's not clear whether the increased demand for Pinterest ads is driven by its third-party partnerships. When Pinterest announced its partnership with Amazon, it said, "The partnership will be a multi-quarter implementation, which we expect to begin rolling out later in 2023." While it may have already started, at the very least there's more to come. Which is great news for Pinterest shareholders.
With the increase in ad load, Pinterest should be able to generate mid-single-digit revenue growth if everything else remained equal. That's what it guided for at the end of Q1. But there are several additional factors that will push revenue growth much higher.
Pinterest is back to growing
Pinterest is showing progress in returning to growth, both in terms of users and how much time those users spend on the platform.
Pinterest increased monthly active users (MAUs) by 7% year over year last quarter. The growth comes after a year of losing users in the post-lockdown hangover it suffered in 2022.
There's still a long way to go for Pinterest to return to the user levels it saw at the end of 2020, particularly in the U.S. and Canada. It ended Q1 with about 14 million fewer American and Canadian users than two years ago, but the user base has stabilized over the last three quarters.
In Europe, it's showing strong progress as it marches back toward its peak levels. It's added 11 million users in the region over the last three quarters. It sits just 8 million users shy of where it was two years ago.
Meanwhile, "Rest of World" users have surpassed their count from two years ago, adding 9 million net new users last quarter. The fast-growing emerging markets represent a big opportunity for Pinterest.
Importantly, Pinterest is working to increase engagement on its platform, and it's paying off nicely. Sessions, impressions, and time spent all grew faster than MAUs in Q1.
That means Pinterest has more users spending more time on the platform. And with the increased ad load, it means they're seeing more ads per session, impression, or minute spent on Pinterest. The result should be strong revenue growth as Pinterest's user base continues to come back to early 2021 levels.
After management guided for revenue growth to stay around 5% in Q2, Pinterest could surprise to the upside. And the growth prospects look even better long term, although Wall Street analysts already expect the top line to reaccelerate some in the back half of 2023 and 2024. Still, with shares trading around the same level they were before Pinterest's disappointing earnings, it looks like a good time to add shares.
