Pinterest (NYSE:PINS) Reports Sales Below Analyst Estimates In Q2 Earnings, But Stock Soars 16.7%

Full Report / September 20, 2022
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Social commerce platform Pinterest (NYSE: PINS) fell short of analyst expectations in Q2 FY2022 quarter, with revenue up 8.59% year on year to $665.9 million. Pinterest made a GAAP loss of $43 million, down on its profit of $69.4 million, in the same quarter last year.

Pinterest (PINS) Q2 FY2022 Highlights:

  • Revenue: $665.9 million vs analyst estimates of $666.5 million (small miss)
  • EPS (non-GAAP): $0.11 vs analyst expectations of $0.18 (37.7% miss)
  • Free cash flow of $107 million, down 48.1% from previous quarter
  • Gross Margin (GAAP): 75.2%, down from 79.1% same quarter last year
  • Global Monthly Active Users: 433 million, down 21 million year on year

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.

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 impressive, averaging 46.7% annually. The initial impact of the pandemic was positive for Pinterest's revenue, but growth rates subsequently normalized.

Pinterest Total Revenue

This quarter, Pinterest reported an mediocre 8.59% year on year revenue growth, and this result fell short of what analysts were expecting.

Ahead of the earnings results the analysts covering the company were estimating sales to grow 15.4% over the next twelve months.

Usage Growth

As a social network, Pinterest can generate revenue growth by increasing user numbers, and by charging more for the ads each user is exposed to.

Over the last two years the number of Pinterest's monthly active users, a key usage metric for the company, grew 11.7% annually to 433 million users. This is decent growth for a consumer internet company.

Pinterest Global Monthly Active Users

Unfortunately, in Q2 the number of monthly active users decreased by 21 million, a 4.62% drop year on year.

Revenue Per User

Average revenue per user (ARPU) is a critical metric to track for every consumer internet product and for Pinterest it measures how much it makes off ads served to each user, proxy for how valuable advertisers find its audience and its ad-targeting capabilities.Pinterest ARPU

Pinterest’s ARPU growth has been strong over the last two years, averaging 37.7%. The ability to increase price while still growing its user base shows the value of Pinterest’s platform, as its users continue to spend more than last year. This quarter, ARPU grew 13.8% year on year, reaching $1.53 for each of the monthly active users.

User Acquisition Efficiency

Consumer internet businesses like Pinterest grow by a combination of product virality, paid advertisement and occasional incentives, unlike enterprise products that are typically sold by sales teams.

Pinterest is efficient at acquiring new users, spending 35.1% of its gross profit on marketing over the last year. This level of sales and marketing spend efficiency is indicative of a relatively solid competitive positioning, which gives Pinterest the freedom to invest its resources into new growth initiatives.

Earnings & Free Cash Flow

Investors typically look at a company’s operating income to get a sense of how profitable a core business is. Adjusted EBITDA is the most common profitability metric for consumer internet companies, similar to operating profit, but removes various one time or non-cash expenses to give a more normalized measure of profitability.

Pinterest reported EBITDA of $92 million this quarter, which was a 13.8% margin. Over the last four quarters Pinterest has demonstrated a very strong profitability with average EBITDA margins of 25.1%.

Pinterest Adjusted EBITDA Margin

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Pinterest's free cash flow came in at $107 million in Q2, roughly the same as last year.

Pinterest Free Cash Flow

Pinterest has generated $685.4 million in free cash flow over the last twelve months, an impressive 25.1% of revenues. This extremely high FCF margin is a result of Pinterest asset lite business model and strong competitive positioning, and provides it the option to return capital to shareholders while still having plenty of cash to invest in the business.

Key Takeaways from Pinterest's Q2 Results

With a market capitalization of $12.9 billion, more than $2.65 billion in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.

It was good to see the increase in ARPU.  On the other hand, there was a decline in number of users and the revenue growth was quite weak. Overall, this quarter's results were not the best we've seen from Pinterest. The company currently trades at $25.5 per share.

Is Now The Time?

When considering Pinterest, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. There are a number of reasons why we think Pinterest is a great business. While we would expect growth rates to moderate from here, its revenue growth has been exceptional, over the last three years. On top of that, its strong free cash generation allows it to sustainably invest in growth initiatives, and its EBITDA margins point towards strong profitability of the core business .

The market is certainly expecting long term growth from Pinterest given its EV/EBITDA ratio based on the next twelve months of 20.3x is higher than many other consumer internet companies. Looking at the consumer internet landscape today, Pinterest's qualities stand out and there's no doubt that it is a bit of a market darling. We'd argue that its often wise to hold on to quality businesses long term, but we do want to mention that there seems to be a lot optimism priced in at the moment.

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