Pinterest (NYSE:PINS) Misses Q4 Revenue Estimates, Stock Drops 21.4%

Full Report / February 08, 2024

Social commerce platform Pinterest (NYSE: PINS) missed analysts' expectations in Q4 FY2023, with revenue up 11.9% year on year to $981.3 million. It made a non-GAAP profit of $0.53 per share, improving from its profit of $0.29 per share in the same quarter last year.

Pinterest (PINS) Q4 FY2023 Highlights:

  • Revenue: $981.3 million vs analyst estimates of $990.2 million (0.9% miss)
  • Revenue guidance for Q1 2024: $698 million vs analyst estimates of $703 million (0.7% miss)
  • EPS (non-GAAP): $0.53 vs analyst estimates of $0.51 (3.3% beat)
  • Free Cash Flow of $254 million, up 136% from the previous quarter
  • Gross Margin (GAAP): 81.9%, up from 79.3% in the same quarter last year
  • Global Monthly Active Users: 498 million, up 48 million year on year (beat vs. expectations of 488 million)
  • Market Capitalization: $27.53 billion

Created with the idea of virtually replacing paper catalogues, Pinterest (NYSE: PINS) is an online image and social discovery platform.

Pinterest is an online content and visual discovery platform that allows its users to create personalized collections of curated design or inspiration ideas while also providing recommendations based on a user’s personal interests. One part search engine and one part media platform, Pinterest is a hybrid of ecommerce and social media platform. For its users, most of which are female, Pinterest is a platform that offers discovery of items such as recipes, fashion, and home goods, and does so in an aspirational social media like use case.

For advertisers, Pinterest’s scale of hundreds of million monthly users is a valuable platform to target advertising where users innately are actively moving from ideation to purchasing, which is exactly where advertisers most like to insert themselves, when a potential customer is showing buying intent. As a bonus, unlike other social media platforms, advertising on Pinterest is content, a unique situation for advertisers.

Social Networking

Businesses must meet their customers where they are, which over the past decade has come to mean on social networks. In 2020, users spent over 2.5 hours a day on social networks, a figure that has increased every year since measurement began. As a result, businesses continue to shift their advertising and marketing dollars online.

Pinterest (NASDAQ: PINS) competes with fellow social media advertising platforms like Google (NASDAQ: GOOGL), Meta Platforms (NASDAQ:FB), Snapchat (NYSE: SNAP), and Twitter (NYSE: TWTR).

Sales Growth

Pinterest's revenue growth over the last three years has been strong, averaging 28.3% annually. This quarter, Pinterest reported mediocre 11.9% year-on-year revenue growth, missing Wall Street's expectations.

Pinterest Total Revenue

Usage Growth

As a social network, Pinterest generates revenue growth by increasing its user base and charging advertisers more for the ads each user is shown.

Over the last two years, Pinterest's monthly active users, a key performance metric for the company, grew 3% annually to 498 million. This is one of the lowest rates of growth in the consumer internet sector.

Pinterest Global Monthly Active Users

In Q4, Pinterest added 48 million monthly active users, translating into 10.7% year-on-year growth.

Revenue Per User

Average revenue per user (ARPU) is a critical metric to track for consumer internet businesses like Pinterest because it measures how much the company earns from the ads shown to its users. ARPU can also be a proxy for how valuable advertisers find Pinterest's audience and its ad-targeting capabilities. Pinterest ARPU

Pinterest's ARPU growth has been decent over the last two years, averaging 6.6%. The company's ability to increase prices while growing its monthly active users demonstrates the value of its platform. This quarter, ARPU grew 1.1% year on year to $1.97 per user.

Pricing Power

A company's gross profit margin has a major impact on its ability to exert pricing power, develop new products, and invest in marketing. These factors may ultimately determine the winner in a competitive market, making it a critical metric to track for the long-term investor. Pinterest's gross profit margin, which tells us how much money the company gets to keep after covering the base cost of its products and services, came in at 81.9% this quarter, up 2.6 percentage points year on year.

For social network businesses like Pinterest, these aforementioned costs typically include customer service, data center, and other infrastructure expenses. After paying for these expenses, Pinterest had $0.82 for every $1 in revenue to invest in marketing, talent, and the development of new products and services. Pinterest Gross Margin (GAAP)

Gross margins have been trending up over the last 12 months, averaging 76.8%. Pinterest's margins are some of the highest in the consumer internet sector, enabling it to fund large investments in product and marketing during periods of rapid growth to stay one step ahead of the competition.

User Acquisition Efficiency

Unlike enterprise software that's typically sold by dedicated sales teams, consumer internet businesses like Pinterest grow from a combination of product virality, paid advertisement, and incentives.

Pinterest is efficient at acquiring new users, spending 39.8% of its gross profit on sales and marketing expenses over the last year. This level of efficiency indicates relatively solid competitive positioning, giving Pinterest the freedom to invest its resources into new growth initiatives.

Profitability & Free Cash Flow

Investors frequently analyze operating income to understand a business's core profitability. Similar to operating income, adjusted EBITDA is the most common profitability metric for consumer internet companies because it removes various one-time or non-cash expenses, offering a more normalized view of a company's profit potential.

This quarter, Pinterest's EBITDA came in at $364.8 million, resulting in a 37.2% margin. Furthermore, Pinterest has shown strong profitability over the last four quarters, with average EBITDA margins of 20.2%.

Pinterest Adjusted EBITDA Margin

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Pinterest's free cash flow came in at $254 million in Q4, up 344% year on year.

Pinterest Free Cash Flow

Pinterest has generated $604.9 million in free cash flow over the last 12 months, an eye-popping 19.7% of revenue. This robust FCF margin stems from its asset-lite business model, scale advantages, and strong competitive positioning, giving it the option to return capital to shareholders or reinvest in its business while maintaining a healthy cash balance.

Key Takeaways from Pinterest's Q4 Results

It was good to see Pinterest add new users this quarter and beat expectations for MAUs (monthly active users). That stood out as a positive in these results. On the other hand, its revenue unfortunately missed analysts' expectations and its revenue growth stalled. Revenue guidance for the next quarter also fell below expectations. Overall, this was a mediocre quarter for Pinterest. The company is down 21.4% on the results and currently trades at $32.02 per share.

Is Now The Time?

Pinterest may have had a bad quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

There are several reasons why we think Pinterest is a great business. For starters, its revenue growth has been good over the last three years, and its growth over the next 12 months is expected to exceed that. And while its growth in monthly active users has been lackluster, the good news is its impressive gross margins are a wonderful starting point for the overall profitability of the business. On top of that, its powerful free cash flow generation enables it to stay ahead of the competition through consistent reinvestment of profits.

At the moment Pinterest trades at 31.0x next 12 months EV-to-EBITDA. Looking at the consumer internet landscape today, Pinterest's qualities stand out, and we like the stock at this price.

Wall Street analysts covering the company had a one-year price target of $40.33 per share right before these results (compared to the current share price of $32.02), implying they saw upside in buying Pinterest in the short term.

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