After a sharp rebound over the summer (from lows made during the tariff-driven sell-off in April) Pinterest's (PINS 0.49%) latest earnings report knocked the stock lower again. What spooked investors? Management issued worse-than-expected revenue guidance for the important holiday quarter.
The stock's massive drawdown on Wednesday brings Pinterest's long, disappointing five-year return back into focus. Is the stock simply not investable?
Image source: Getty Images.
What Pinterest got right (and got wrong)
Pinterest posted third-quarter revenue of $1.05 billion, up 17% year over year, helped in part by sharp growth in active users; the social media company's monthly active users reached 600 million, up 12% year over year.
Profitability improved, too. The company recorded $92 million in generally accepted accounting principles (GAAP) net income and $306 million in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), with free cash flow of $318 million. Those are solid numbers in an uncertain and somewhat choppy digital advertising environment.
Guidance, however, is where the story cooled. For the all-important fourth quarter, management guided revenue between $1.313 billion and $1.338 billion, implying 14% to 16% growth -- healthy, but just shy of what the market hoped for.
NYSE: PINS
Key Data Points
The details -- and the big picture
If you think the market's reaction to the report is unfair, some perspective is in order.
First, given that the company competes in the same space as social media and technology giants with far more resources, investors demand rapid growth from Pinterest. Without it, the market may start worrying that Pinterest's well-capitalized peers are simply too difficult to compete against.
Second, the holiday quarter is typically the company's busiest season, so investors were likely hoping for the best during this important period.
Finally, the conservative guidance might have been somewhat forgivable if it were accompanied by nothing but optimism from management. But, unfortunately, this wasn't the case. Pinterest chief financial officer Julia Donnelly flagged a softer spending environment in the U.S. and Canada during the company's third-quarter earnings call.
"We did face pockets of moderating ad spend in [the U.S. and Canada] in Q3 as larger U.S. retailers navigate tariff-related margin pressure in the current environment," Donnelly explained. However, she did note that there was some "accelerating strength" across its international markets. But this wasn't enough to stop investors from worrying about Pinterest's core U.S. and Canada business.
So is Pinterest a buy?
While I personally already didn't find Pinterest to be an attractive stock going into the report, it's worth emphasizing that I still don't -- even after the big pullback in the share price. Online product discovery is a highly competitive space, with major online marketplaces posing a direct threat to Pinterest's model. They, too, are on the never-ending quest to improve discovery on their platforms and apps.
Until Pinterest experiences an inflection point in ad revenue growth rates and reaches a scale of over 1 billion monthly active users, demonstrating its staying power, this is a stock I don't mind staying on the sidelines for.
With that said, Pinterest could prove me wrong. There are some exciting things going on at the company. For instance, the company's artificial intelligence (AI) is trained to be proactive.
"It anticipates what users will love next, curating a fresh feed of personalized recommendations that are ready, the moment they return," explained Pinterest CEO Bill Ready in the company's third-quarter earnings call. This ultimately advances "their commercial journeys without the user having to ask, which is effectively the promise of agentic experiences," he added.
If this approach to employing AI becomes a core competence and a competitive edge, I may revisit my stance on the stock. But I worry that cash-rich peers may lean into AI even more aggressively and steal some of Pinterest's thunder.
Sure, with the stock trading at a forward price-to-earnings multiple of 15, shares aren't expensive. Indeed, they may even look cheap relative to fundamentals. But given the uncertainty about how the company will hold up against an intensely competitive online environment, shares just aren't cheap enough, in my opinion.
