It's been a tough environment for advertising. The visual-based idea discovery and sharing platform Pinterest (PINS 4.04%), which makes the bulk of its money from advertising, is a great example of a company hit hard by advertiser uncertainty.
The company's revenue growth slowed dramatically in 2022, and 2023 has remained lackluster. But investors should take a deep breath: At the company's Investor Day presentation this week, management said it thinks this slow growth is only temporary.
An upbeat update from Pinterest this week is both encouraging and timely. Piecing together a forecast for advertising spend during such an uncertain time is difficult. For this reason, most companies with business models generating the bulk of their sales from advertising revenue are trading well below their all-time highs, as investors brace for a wide range of potential business outcomes amid a high-interest-rate and inflationary environment.
Improving trends
Pinterest shared a handful of encouraging metrics during its Investor Day presentation, pointing to positive trends and expectations for its business. Specifically, management reiterated guidance for revenue to increase at a rate in the "high-single-digit range" during its third quarter. This notably implies an acceleration from its second-quarter revenue growth rate of 6% year over year.
Driving home how significant this guidance is, Pinterest Chief Financial Officer Julia Donnelly said during the company's Investor Day presentation that the company's guidance represents "an acceleration in revenue growth versus the previous 3 quarters and notably is lapping a Q3 of 2022 where we were growing revenue while many of our competitors began to decline." Highlighting what the CFO meant by this, Pinterest's third-quarter 2022 revenue rose 8% year over year, while Meta Platforms' revenue declined 4%.
Looking beyond Q3, however, management emphasized that it thinks the company can grow even faster. "We believe we can grow revenue faster than the overall market, with multiple ways to get there, resulting in a mid to high teens revenue [compound annual growth rate] over the next 3 to 5 years," said Donnelly.
An important caveat
Before investors get too excited, they should pay attention to one big caveat implicit in management's upbeat guidance. Donnelly warned that its assumptions bake in "a stabilized to slightly improving digital advertising market" going forward.
But this may not be as much of a stretch as investors might initially think. Donelly said that such a market is consistent with what it sees today. In other words, Pinterest's rosy view assumes a steady state. With the current state being far from a booming economy, there may even be room for upside in management's forecast.
Good news for more than Pinterest
Importantly, Donnelly's view of the current advertising market and the company's move to reaffirm its guidance for accelerating top-line growth isn't just good news for Pinterest. It probably means good things for many tech companies making the bulk of their revenue from digital advertising.
Further, this encouraging business update from Pinterest adds to more positive news from connected-TV operating-system specialist Roku (ROKU -10.29%) earlier this month. Roku raised its third-quarter revenue guidance, saying it now expects to report a third-quarter revenue growth rate as high as 15% for Q3. A significant portion of Roku's business comes from advertising revenue, so this is another key encouraging metric for shareholders with investments in the digital-advertising space.
