I read a headline from a few days ago that said Pinterest (NYSE:PINS) was down more than 20% since announcing its Q2 2021 earnings. As I write this, PINS stock has fallen further. It’s now down 27% since its July 29 announcement.
All of the damage done is the result of a perceived slowdown in user growth. If you own Pinterest stock, here’s why I think the glass remains half full.
In the end, I think you’ll agree.
PINS Stock and User Growth
The underlying theme behind Pinterest’s latest decline is the fear that the best days for Pinterest are behind it. I say latest because, since its April 2019 IPO at $19, it’s had several corrections of 10% to 20% or more over a relatively short period, including three in 2021 alone.
Now that the pandemic is waning, investors fear Pinterest is a sucker’s bet.
I don’t know about you, but I see the pandemic picking up steam right now, but that’s a subject for another day. Some feel the smarter buy is one of its competitors who better monetize each user.
That’s a fair concern.
Pinterest’s expected to generate average revenue per user (APRU) in Q3 2021 of $1.37. That’s 62% less than Snap (NYSE:SNAP) at $3.63, 75% less than Twitter’s (NYSE:TWTR) ARPU of $5.42, and 87% less than Facebook’s (NASDAQ:FB) ARPU of $10.23.
Numbers don’t lie. Right? Wrong.
When Pinterest went public, it had an ARPU of 73 cents. Assuming it hits the estimated Q3 2021 ARPU of $1.37, its global ARPU has grown by 88% in the 10 quarters since. By comparison, in the same 10 quarters, Snap’s ARPU has grown by 116%, from $1.68 in Q1 2019 to $3.63 in Q3 2021.
On the surface, you might take away from this comparison that Snap grew 32% faster than Pinterest. However, Snap has been a public company for two more years than PINS. Also, its base revenue from Q1 2019 ($320.4 million) was much higher than Pinterest’s ($201.9 million), suggesting Snap was further along in the process of monetization.
International ARPU Is Key
In my last article about Pinterest in late August, I discussed why its international ARPU was the key to its future profitability.
In the second quarter, international APU was 36 cents, 38% higher than in Q1 2021. As a result, not only did Pinterest generate a GAAP profit of $69.4 million in the second quarter, it was 415% higher than a GAAP loss of $22 million in the first quarter.
Pinterest is ahead of the game. If its international ARPU continues to grow by 30% to 40% each quarter, it will break through $1 within four quarters.
I continue to believe that once it hits this mark, regardless of what happens to user growth in the U.S., it will be a license to print money, driving its stock considerably higher than where it’s currently trading around $54.
Bloomberg recently reported some comments from Mitch Rubin, the portfolio manager for the RiverPark Long/Short Opportunity Fund. He believes that the most important job for Pinterest at this point is to monetize the 450 million users it already has and not get caught up in user growth statistics.
“We have a lot of confidence that the arc of monetization is steep growth, and we have a huge degree of confidence that if it executes, the profits will be enormous, because the margins are so high,” Rubin told Bloomberg on Aug. 31.
I could not agree more.
In the second quarter, its international ARPU was 7% of its U.S. ARPU at $5.08. That’s up from 5.6% a year earlier. Imagine if that percentage were to get up to 20% or more. Its international MAUs (monthly active users) account for 80% of its total MAUs.
Enormous doesn’t begin to describe the revenue potential over the next few years.
The Bottom Line
The keywords from Rubin’s lips were “if it executes.”
I don’t think there’s any question that Pinterest has an excellent business model and platform that’s ideally suited for advertisers looking to spice up their brands and generate a little e-commerce business at the same time.
But CEO and founder Ben Silbermann and his team still have to keep on the attack.
I think he continues to do an excellent job moving the business forward. But, of course, time will tell if I’m right.
If you agree with me, $56 is the best price for PINS stock in almost a year. How many stocks can you say that about in this frothy market? Not many.
PINS is a long-term buy.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.