2023-03-11 07:58:30 ET
Summary
- Shares of Pinterest have weakened since reporting earnings in early February, despite positive user trends.
- The company's app redesign has led to a resurgence in MAU growth, particularly in Europe.
- Macro headwinds, however, are pushing ad rates down and pressuring ARPU, which is causing deceleration in revenue growth.
- At the same time, Pinterest's cost structure is ballooning, leading to sinking profitability.
It's a precarious time for tech stocks. Year to date, most tech names have still rallied substantially, but the overhang of a tough macro environment plus early indicators that the recession may be longer-lived than we initially expected (including the collapse of Silicon Valley Bank ( SVB )) requires us to be more diligent in the names we retain in our portfolios.
In particular, I think Pinterest ( PINS ) is in a tough spot. This social media stock, long considered a niche play in an industry largely dominated by Meta Platforms' ( META ) Instagram and Facebook, has seen much of its year-to-date gains wiped away since the company reported results in early February. Profitability is the key eyesore here: though Pinterest is seeing encouraging user trends, costs are rising and eating into profitability, calling into question Pinterest's valuation.
I remain bearish on Pinterest in 2023, especially after reading into the company's latest results. There are red flags here to be wary of:
First, expectations for Pinterest may already be hot. For the current fiscal year, Wall Street analysts are expecting Pinterest to generate $3.05 billion in revenue, representing 9% y/y growth. Exiting Q4 of 2022, Pinterest grew revenue at only a 4% y/y clip, and its outlook for Q1 calls for only low single-digit growth in revenue. Pinterest isn't seeing tremendous user growth, and macro headwinds make it unlikely that advertiser rates will meaningfully improve - meaning the path to revenue acceleration will be precarious. There's a big chance that Pinterest is set up to fail against expectations this year.
Secondly, profitability is under fire. This is a far more risk-averse market, especially with jarring events like the SVB collapse. Investors are laser-focused on tech companies' profitability profiles; gone are the days when growth at all costs was in fashion. Pinterest has invested a substantial chunk of resources into product roadmap enhancements and marketing to acquire new users, and the result is substantial declines in adjusted EBITDA - which will be a major watch item this year.
Third and last, Pinterest isn't even cheap enough to justify these substantial risks and its relatively lower growth profile. At current share prices near $24, Pinterest trades at a market cap of $16.53 billion. After we net off the $2.70 billion of cash on Pinterest's most recent balance sheet, the company's resulting enterprise value is $13.83 billion. This represents a valuation multiple of 4.5x EV/FY23 revenue - not exactly expensive, but considering the single-digit growth profile, not exactly alluring either.
In my view, investors are best moving to the sidelines on Pinterest. Looking beyond the short-term, I see further risk for Pinterest - it has always been a niche-driven social media platform that is prone to disruption by newer and trendier platforms. In the long run, Pinterest may not be able to hang on to its relatively smaller user base as platforms like Instagram become all-encompassing, general-purpose social media giants.
Steer clear and invest elsewhere.
Q4 download
Let's now discuss Pinterest's latest Q4 results in greater detail, starting with user trends. Take a look at the MAU trends in the chart below:
MAU growth re-accelerated to 4% y/y, after a year of declines in 2022. MAU growth was especially pronounced in Europe, which saw a net add of 4 million users (though this is after several quarters of declines reaching a valley of 117 million MAUs in Q2; this may just be a volatile region in general). On a year over year basis, the ex-US/Europe segment also saw strong 31% y/y growth. The company attributed net user adds to its investments in personalization, as well as a splashy brand marketing campaign that aired for the majority of the fourth quarter.
Slightly more disappointing is the fact that growth in the U.S./Canada was flat, both sequentially and year over year. Though the smallest reporting segment for Pinterest, a U.S./Canada user generates $7.60 in ARPU as of the fourth quarter, indexing nearly 4x the total company average. U.S. revenue is also 82% of the company's total.
In that vein, ARPU in Europe was down -9% y/y, offset by growth in the U.S. and Canada for overall flat 1% y/y growth in ARPU:
The company here pointed to softening ad demand which lowered ad pricing throughout the quarter. It also noted weaker spending among mid-market and SMB advertisers.
As a result, despite the re-acceleration in user growth, revenue growth decelerated to 4% y/y, down four points from 8% y/y in Q3. As a reminder again, the company does not expect revenue to accelerate in its Q1 outlook, which calls for Pinterest to sustain low single-digit revenue growth rates.
Looking ahead, the company's strategy to stimulate ARPU growth is to invest in more video content (which tends to generate higher ad engagement) as well as to continue buildout out advertiser tools. Per CEO Bill Ready's remarks on the Q4 earnings call :
As I discussed last quarter, video also drives deeper engagement. We remain focused on growing our supply of videos from multiple sources, including creators, brands and publishers. Last quarter, we grew our supply of video content 30% quarter-over-quarter. And we recently announced a deal with Condé Nast Entertainment to create high-quality video content aligned with Pinterest's key seasonal and cultural moments like fashion months, wedding season, summer and back-to-school. We believe high-quality and inspiring content will further deepen engagement, especially for Gen Z.
Monetization per user should also be driven by our ads initiatives. Pinterest is unique because users come to our platform with intent, and we are one of the few places where people can go from seeking inspiration to fulfilling that intent through action. And we've built a full ad solution that helps advertisers meet users in their journey across the funnel from top to middle to bottom."
Unfortunately, however, the company still suffered massive declines in adjusted EBITDA, which fell -44% y/y to $196 million:
This was driven by a ballooning of expenses, particularly a 49% y/y bump in sales and marketing expenses (a nine-point increase as a percentage of revenue), owing to the company's brand marketing campaign efforts in the fourth quarter. Overhead and R&D spend, however, also rose more than 30% y/y each.
Against the expectations of just single-digit growth in revenue, it's unclear if Pinterest is on a sustainable path.
Key takeaways
Rising costs, squeezed ad rates, and a not-so-appealing valuation: there are a number of reasons to be wary on Pinterest going forward. Move to the sidelines here and invest elsewhere.
For further details see:
Pinterest: More Risk Than Reward