Pinterest (NYSE:PINS) is a social media company, or as Yahoo Finance states, “[a] visual discovery engine in the United States and internationally” that helps you get inspired by finding content about the latest recipes, style, home inspiration, DIY tips, and more. In an era where the pandemic is still present, getting inspiration and being in a positive mood is priceless.
PINS stock is down about 30% in 2021. The third-quarter 2021 earnings were strong, but not enough to fuel a stock price rally. News that PayPal (NASDAQ:PYPL) was interested in buying Pinterest proved to be false and only temporarily boosted the PINS stock.
Pinterest is an interesting company with positive developments. However, its stock now faces a couple of hurdles. What is next for PINS stock?
Strong But Declining Revenue Growth
Pinterest is a one-stop source to discover recipes, tips about home ideas, style inspiration, and other ideas to try. Unlike other social media platforms, Pinterest has a focus on image sharing and content, such as animated GIFs and videos. Users can create and manage theme-based image collections to follow specialized content that matches their interests and hobbies. Pinterest also offers advertising for businesses on its platform.
From a sales growth perspective, Pinterest’s business model looks like a big hit. Since 2018, Pinterest has reported solid annual revenue growth of over 45%. In 2019 and 2020, revenue growth was 51.17% and 48.12%, respectively. However, a closer look at the business model shows it has at least two severe fundamental flaws. First, there is no profitability yet. Second, revenue growth seems to be losing momentum.
One of the most interesting things about Pinterest is that constant creativity and innovation are synonymous with its philosophy as a visual search engine. Pinterest is always on the move to present changes to its users. In late October 2021, Pinterest introduced “Takes,” and new way to watch, discover and shop. It was unveiled at the second annual Pinterest Creators Festival as a change Pinterest made to inspire creators to make content that will boost engagement, based on the idea of “watch, make and shop.”
A redesign of the home feed was also announced to offer a new and better experience to users.
The pandemic and the momentum of stay-at-home stocks, such as Pinterest, was certainly beneficial for revenue. However, the reopening of global economies even with the resurgence of Covid-19 cases may turn out to have been a statistical outlier in the revenue trend. For the first three quarters of 2021, Pinterest has generated revenue that is already higher than the total revenue of 2020. The big questions now are how much higher will total revenue be in 2021, and is it sustainable?
Key Metrics to Monitor
Pinterest has at least two key metrics related to growth and profitability that analysts monitor closely. The two metrics are monthly active users (MAUs) and average revenue per user (ARPU).
Pinterest has announced two consecutive strong quarters, Q2 2021 and Q3 2021. In this press release, Pinterest announced that “Q2 revenue grew 125% year over year to $613 million. Global Monthly Active Users (MAUs) grew 9% year over year to 454 million. GAAP net income was $69 million for Q2. Adjusted EBITDA was $178 million for Q2.”
A press release for Q3 2021 mentions, “Q3 revenue grew 43% year over year to $633 million. Global Monthly Active Users (MAUs) grew 1% year over year to 444 million. GAAP net income was $94 million for Q3. Adjusted EBITDA was $201 million for Q3.”
The 444 million MAUs shows a clear decline from the figure of 454 million for Q2 2021.
The good news is that the global ARPU of $1.32 for Q2 2021 increased to $1.41 in Q3 2021. It seems as if it is all about the sweet spot in between these figures. Can Pinterest continue to increase its ARPU number in case MAUs figures continue to decline? This is a challenging math equation to solve.
PINS Stock: The Bad News
It seems 2021 will be the year that Pinterest will deliver profitability. Data from Simply Wall Street shows that analysts estimate a 35.1% forecasted annual earnings growth.
The bad news is that shareholders have been diluted in the past year, with total shares outstanding having grown by over 5%. The stock seems expensive, too. With a price-to-book ratio of 11.5x compared to the U.S. Interactive Media and Services industry average of around 4x, Pinterest now trades at a premium.
I consider Pinterest a stock to monitor, as 2021 will probably be a milestone financial year with profitability. But its valuation is rich. Therefore, I would like to see more positive earnings in the next few quarters and if the decline in the global MAUs is temporary or not. Jumping in now to take advantage of the stock price decline in 2021 is not justified unless you are a contrarian investor.
On the date of publication, Stavros Georgiadis, CFA 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.
Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com/. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.