2023-04-28 07:20:44 ET
Summary
- Pinterest reported a solid quarterly beat for Q1'23, but the company only grew revenues by 5%.
- The stock fell after hours due to guidance for double-digit operating expense growth in Q2'23, but the company needs to invest aggressively in enhancing the shopping experience.
- Pinterest quickly becomes cheap as the stock dips to 4x forward EV/S targets.
The market doesn't like the Q2'23 guidance from Pinterest ( PINS ), but the numbers are clear that the social imaging company needs to spend to win the large market opportunity. The company has a large user base that is currently being vastly under monetized suggesting more spending is needed. My investment thesis remains ultra Bullish on the stock following the after-hours dip.
Source: Finviz
Focus On What Counts
Pinterest reported revenues grew 5% beating analyst estimates. While the revenue growth wasn't impressive, the company continued a path of growing monthly active users (MAUs) after a period of struggling following the Covid pull forwards.
The social imaging company now has a user base of 463 million MAUs, up 30 million from Q1'22. Pinterest peaked at 478 million MAUs during the Covid surge and the company spent until the start of 2022 to turnaround user growth.
Pinterest is back in solid growth mode, though most of the user growth comes from the rest of the world where the ARPU rates are far lower. The company reported total ARPU dipped by 1% to $1.32, but all of the geographic areas grew YoY during the quarter.
The headline number is somewhat misleading as the growth in ROW users only generating $0.10 in ARPU will skew the quarterly numbers. What matters is that the U.S. & Canada rate grew 3% YoY to $5.11, but the number far trails social media giant Meta Platforms ( META ) that just delivered a quarter with nearly 10x the APRU in the US & Canada at $48.85 .
Pinterest brought in Bill Ready from Google ( GOOG ) in order to advance the platform into social commerce. The massive user base uses the site to find goods to purchase and the goal is to include Pinterest in the cut by converting sales on Pinterest versus allowing users to transverse to another site and possibly lose the sale in the process.
Spending For the Future
The new CEO plans to ramp up spending in order to capture this large market opportunity. The company forecasts spending low teens percentage point QoQ more in Q2'23 in order to capture the larger opportunity and make up for delayed investments in Q1.
The market doesn't like Pinterest forecasting more spending while only predicting sales to grow again in the 5% range. Pinterest has a cash balance of $2.7 billion, so the company has the capital to aggressively spend here while the majority of competitors aren't flush with cash.
The company produced positive adjusted EBITDA in the recent quarter and investors should want the social platform to spend to close the ARPU gap with Meta. A prime example of where Pinterest should ramp up spending where necessary is the indications of shopping leading to 30% growth per CEO Bill Ready on the Q1'23 earnings call :
We've talked a lot about shopping on our platform, our early indicators of success on shopping. We could not feel better about as we have brought more shoppable content into our core surfaces. We've seen 30% plus increases in engagement on shoppable pins and 30% plus year-on-year increase in attributed checkouts for merchants who are uploading their catalogs to us.
Just closing 50% of the ARPU gap with Meta leads to Q1 revenues of ~$3 billion versus the actual reported revenue of $603 million. The opportunity is far too wide to just sit around and meekly invest in the future when the capital is readily available.
The stock market should reward the company with being aggressive here. Bill Ready wasn't brought into the business to meander around with limited ARPU.
The stock had run into earnings and wasn't entirely appealing heading into the report trading up above. Pinterest was trading at a forward EV/S multiple of 5x versus Meta down at slightly above 4x.
Takeaway
The key investor takeaway is that Pinterest becomes appealing, if the stock holds the after-hour losses topping 10%. The social imaging company will be solid buy with the forward EV/S multiple dipping towards 4x. The company has too much growth opportunity ahead when the ad market improves and the third-party ad deal with Amazon ( AMZN ) could help drive major growth in social commerce and expand the ARPU.
For further details see:
Pinterest: Spending To Win Social Commerce