Shares of image-browsing platform Pinterest (PINS +1.50%) tanked on Friday after the company reported financial results for the third quarter of 2024. As of 11:15 a.m. ET, Pinterest stock was down 15% and approaching 52-week lows. And investors could be perplexed by this, considering its Q3 financial results beat expectations.
For context, Pinterest had 537 million monthly active users at the end of Q3, an all-time high. And higher revenue per user led to 18% year-over-year revenue growth. Moreover, it had net income of over $30 million, which was higher than expected.
NYSE: PINS
Key Data Points
However, Pinterest's ad pricing fell by 17%, and that's why the stock tanked today.
What does ad pricing have to do with anything?
Pinterest generates revenue by displaying advertisements alongside the images that its users browse through. Advertisers compete for these slots, and pricing is ultimately determined by supply and demand. But in Q3, supply far surpassed demand, leading to a 17% drop in the average price per ad.
Pinterest still grew revenue because its ad impressions increased by an enormous 41% -- the amount of times users saw an ad. Granted, some of this is justified by its 11% user growth. But it's clear the company muscled its way to revenue growth by simply increasing the frequency of ads, which isn't ideal. It would be far better if revenue had gone up because demand from advertisers was surging.
It's not all doom and gloom
Pinterest is far from a dying business. Monthly user trends are strong, and it's a profitable company. Moreover, management just authorized a new $2 billion buyback program, which will be more effective now that the stock is down.
That said, investors can rightly question sustainability at Pinterest. It can't continue to increase ad impressions at this rate -- eventually, users could feel bombarded. The platform has long held a lot of promise, but shareholders will want to see monetization growth from better pricing in the future.
