I almost forgot I even owned shares of Pinterest (PINS 4.04%). The visual search and social media platform hired CEO Bill Ready over the summer of 2022, and rumors emerged late in the year that the company was an acquisition target (largely owing to the stake taken by activist investment firm Elliott Management). Nevertheless, content with the early progress from Ready and the top team, I decided to leave it alone and come back later to see what progress was made.
Turns out the progress has been pretty good, and Pinterest is a financially sustainable business again. Let's see where the company could go from here.
Surpassing its previous business record
The most surprising bit of news to me from last quarter's update was that Pinterest has actually re-achieved its all-time high monthly average user (MAU) count -- which was last set in the early months of 2021 during the pandemic, before falling off. MAUs came in at 482 million, a few million more than the previous Q1 2021 peak and a steady climb from lows in early 2022 (as the world was reopening from the pandemic and time spent at home started to ease).
Average revenue per user (ARPU) has also slowly but steadily increased since Ready took the reins, despite global economic worry that has put a cap on many parts of the digital advertising industry. When times are tough, ads are often the first thing that get cut from business budgets. ARPU set a new Q3 record as well, increasing 5% year over year in the U.S. and Canada, and jumping 26% year over year in Europe.
It isn't the type of progress that will send Pinterest stock soaring higher, but this was a very solid quarter.
Ready, who came over from Alphabet's Google Commerce and Payments, has been leaning into Pinterest's strength as a shopping platform. AI investments have been made to increase user engagement, making the search and discovery process on Pinterest more meaningful. And tools for marketers (more AI there, too) have also made ads more relevant for those eyeballs.
Rather than being an annoyance, Ready believes ads relevant to a user's search actually increase the strength of the Pinterest experience. AI isn't just hype. It can have a meaningful impact on business performance. The argument would seem to be valid judging from the financial numbers.
Best of all, though, is the fact that Pinterest is back on track toward being financially sustainable. The adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) profit margin was 24% in Q3, and net income also swung to a small $6.7 million profit, versus a loss of $65 million the same period last year. Again, no rocket ships here, but good progress nonetheless.
Heading toward business sustainability
Pinterest also had its first investor day prior to the Q3 update, and management reiterated its belief on the earnings call that it can achieve an average revenue growth rate in the mid- to high-teens percentage over the next few years. Along the way, the goal is to expand EBITDA margins to the low-30% range. So far, so good. Top-line growth and increasing profit margins are a winning long-term combination for investors.
A share repurchase program is also doing good things, as share count has actually been decreasing this year -- rather than an increasing share count that was diluting shareholders in years past. So far in 2023, $500 million has been used to repurchase stock, and given Pinterest remains highly free-cash-flow-positive, it hasn't dented the balance sheet much. Cash and short-term investments totaled $2.3 billion and the company had no debt at the end of September 2023.
I'm not adding to my position in Pinterest at this time. The stock isn't exactly cheap at 46 times enterprise value to trailing-12-month free cash flow. But recent progress is enough to keep me happy holding what I have. Pinterest's comeback looks like it could be sustainable if Ready and company keep delivering modest increases like they just did in Q3.
