The steep drop in shares of Pinterest (NYSE:PINS) resumed after the company posted quarterly earnings on April 27. Investors fretted over the user growth warning ahead of the re-openings. During the pandemic, markets became complacent on this high-flying social networking site’s user growth prospects. PINS stock, which had a roller-coaster first quarter, but was up 14% ahead of earnings, is now down more than 24% since the results report. The stock is in danger of correcting further.
What happened? The resurgence of Covid-19 infections, due to variants and a lack of full shutdowns, fueled Pinterest’s growth. But now that vaccination rates are slowing the virus spread in the U.S. and the U.K, people will likely curtail their time spent on Pinterest. The first quarter is a defining milestone for the company. The firm posted revenue growing by 78.3% year-on-year to $485 million. Adjusted EBITDA swelled to $84 million, above the $57.4 million analyst estimates. Conversely, monthly active users of 478 million did not meet the consensus estimate of 480.5 million.
Pinterest said it expects Q2 global MAUs to grow only in the mid-teens. U.S. MAUs will be around flat on a year-on-year comparison. Sequential operating expenses will accelerate. In Q1, the company posted a 3-cent GAAP EPS loss. So, Q2 losses will likely come in higher.
Buy-and-hold investors will justify the expenses as necessary investments to fuel growth. For example, Pinterest will invest in long-term initiatives that support its growth. Its priorities include the Pinner experience, advertiser success, and shopping.
Pinterest Growth Front-Loaded
Covid-19 front-loaded, or pulled forward, the company’s user growth. Stuck at home during the lockdown, people piled onto the site. But in the last quarter, easing restrictions, plus the typical slowdown from seasonality exasperated the MAU figure. In the short-term, the slowdown is noise.
The company is investing in comprehensive marketing. It has creators adding to native content that will drive long-term user engagement. This will lead to higher revenue per engaged user. As MAU falls from the post-Covid world, Pinterest will expand margins from its core customer base.
On its conference call with PINS stock analysts, CFO Todd Morgenfeld, said it invested in the product that aligns advertisers to their set budgets, goals, and content. The improved solution is an average revenue per user growth (ARPU) opportunity. Pinterest will meet the needs of the SMB market. As a result, Pinterest could poach advertisers from Twitter (NASDAQ:TWTR) and Facebook (NASDAQ:FB).
Fair Value on PINS Stock
Wall Street analysts are very bullish on PINS shares. The average price target is in the high $80s, according to TipRanks. That’s likely to change, though, as those analysts failed to anticipate the sharp post-earnings report selling.
Stock Rover’s Research Report scores Pinterest stock in the 42-60 range on quality, growth, and value, out of possible 100 score. As shown below, the growth score lags that of the S&P 500 index:
Investors are better off buying an S&P 500 exchange-traded fund if they see growth. The index also offers investing diversification. Still, Pinterest’s 1-year sales growth outpaced that of the industry and the index. It needs to sustain that rate over the next few years (at least three) to outperform the markets.
The stock scores fair on growth and quality, thanks to the user growth and increasing revenues in the last year.
Expect the value score to rise and the growth score to fall next. Pinterest stock may not attract speculators who trade on a sustained, positive momentum. The stock may enjoy an occasional spike at times. This random behavior is not good enough to justify taking a short-term position.
Investors who did not anticipate the sharp drop in user activity on Twitter lost money holding the stock post-earnings. The same bearishness is hurting Pinterest stock. Fortunately, the site’s growth is seasonal. It is coming off a weak period. And while people return to the physical workplace and go outside to restaurants and movies, they will still visit Pinterest. The only difference is that they will spend less time. Still, users will shop more meaningfully by spending the same amount in less time on the site.
Disclosure: On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.