Pinterest NYSE: PINS reported its fiscal first-quarter earnings a week ago, and investors were not happy with what they heard from the social media firm; shares are down more than 21% in the five sessions since the release.
The online product and idea discovery platform beat on the top line and fell just short of expectations on user growth, but investors honed in on disappointing guidance.
While it is reasonable for shares to be trading lower in the wake of the release, the sell-off has been overdone and presents investors with a buying opportunity.
Pandemic Tailwind is Going Away
Pinterest, like many apps, has benefited from the pandemic. The company hasn’t had to compete with traditional ways of socializing such as going out to dinner, partying, and playing sports over the last 14 months. So, it shouldn’t be surprising that Pinterest’s global monthly active users (MAUs) increased 37% yoy to 459 million in 2020.
But Pinterest, also like many apps, acquired users that, if not for the pandemic, may not have signed up until 2021 – or later. This pull-forward effect generates higher growth at the expense of future growth. In Pinterest’s shareholder letter, management admitted that “lockdowns probably pulled forward some user growth during 2020, particularly in the US where our service has been available longer.”
In the second quarter, the social media firm expects “global monthly active users to grow in the mid-teens and U.S. monthly active users to be about flat on a year-over-year percentage basis.”
Wall Street had expected user growth to come in around 20% in the second quarter. Investors weren’t just disappointed in the headline user growth guidance – they were also disappointed in where that user growth is expected to come from.
Pinterest’s US APRU is Much Higher Than International ARPU… But There’s Untapped Potential
In the second quarter, Pinterest’s international average revenue per user (ARPU) increased 91% yoy to 26 cents. That sounds great, but it’s nothing compared to Pinterest’s US APRU, which was up 50% yoy to $3.99. So, Pinterest’s average US user is generating more than 15x the revenue of its average international user.
You can see why investors are upset that Pinterest’s user growth is going to mostly come from the international demographic in the second quarter.
But the concern is overblown for two reasons:
- The US user growth should re-accelerate in 2022. Pinterest is dealing with the aforementioned pull-forward effect and facing tough comps from 2020. But once everything settles, there’s a good chance that Pinterest will get back on track.
- The international ARPU is rising. Yes, 26 cents per user is not much, but 91% yoy growth is nothing to sneeze at. Pinterest is pouring resources into its international operations, so expect the improvement to continue. An international ARPU of more than $1 by the mid-2020s would be a game-changer – and it’s not outside the realm of possibility.
With Pinterest, you need to be careful not to miss the forest for the trees. The company’s top-line growth may not match 2020 levels in 2021, but its long-term future remains bright.
How Should You Play Pinterest?
Pinterest is trading at 15.7x forward sales and 70.9x forward earnings. That might seem like a lofty valuation at first glance, but it’s reasonable for a company that can see explosive growth for many years to come.
The company’s market cap is actually lower than Twitter’s NYSE: TWTR, even though Pinterest seems to have much better long-term prospects.
Turning our attention to the chart, Pinterest’s recent price action indicates that shares could be primed for a reversal.
Shares have previously gotten support in the low-to-mid $60s, and the 200-day moving average is less than five points below the current share price.
We could see a reversal any day now, and shares could then head back towards the recent highs.
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