Pinterest (NYSE:PINS) released its Q1 earnings on April 27 with both good news and bad. The good news is that revenue rose 18% year-over-year (YoY) for the March quarter. The bad news is that its MAUs (monthly average users) fell 9% to 433 million as of the end of the quarter. The problem is they kept dropping. By April 25, global MAUs declined further to 432.9 million. That is not going to help PINS stock.
In fact, the company provided guidance on page 3 of its earnings release that can’t be interpreted in a very kind light. Revenue is forecast to rise 11% in Q2 2022 but operating expenses will rise 10%. In fact, Pinterest said its operating expenses would rise 35% to 40% for the full year. It did not provide any projection for revenue for 2022. That seems to imply that revenue won’t rise as high as operating expenses in 2022. That means the company’s losses could cascade higher.
Oh, just in case you say that I forgot to mention the good news, here it is. Pinterest made positive free cash flow (FCF) during Q1. By my reckoning, its Q1 FCF was $206.5 million. However, if the company’s net income losses rise the FCF will fall.
Where This Leaves PINS Stock
From a practical standpoint, investors should expect that advertising revenue will weaken if the U.S. economy heads into a recession. The truth is that businesses cut out easy-to-eliminate expenses first. Advertising is at or near the top of that list. That is easier to do than cutting someone’s job or cutting hours for non-salaried employees. That will flow down to companies like Pinterest.
So, investors should use a grain of salt when considering Pinterest’s and analysts’ forecasts. For example, Refinitiv reports that analysts forecast $3.06 billion in sales this year, up 19% from $2.58 billion a year ago.
The only problem with that is if MAUs keep falling, how is the revenue going to rise? The average revenue per user (ARPU) would have to rise. Since Pinterest has no subscription revenue, it would have to raise its ad rates. That is not going to happen during a recession. In other words, there will be a problem with higher revenue forecasts over the next year.
And that means PINS stock is vulnerable. That’s the extra bad news. Ad stocks don’t do well in a recession, and no one should think that somehow Pinterest, despite its projections, will be exempt. For example, as it stands, analysts project 99 cents in earnings-per-share (EPS) today. At $20.52 as of April 29, this puts it on a forward price-to-earnings (P/E) of over 20 times. The problem is that the company made just 10 cents per share on a non-GAAP basis in Q1. Earnings will not likely accelerate by the end of the year if a recession occurs.
Here is where this leaves investors. Expect PINS stock to keep dropping. At this time we can’t forecast how much. It will all depend on how bad the economic slowdown will get.
On the date of publication, Mark Hake did not hold (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.