Social commerce platform Pinterest (NYSE: PINS) announced better-than-expected results in Q2 FY2023, with revenue up 6.32% year on year to $708 million. Pinterest made a GAAP loss of $34.9 million, improving from its loss of $43.1 million in the same quarter last year.
Pinterest (PINS) Q2 FY2023 Highlights:
- Revenue: $708 million vs analyst estimates of $695.7 million (1.78% beat)
- EPS (non-GAAP): $0.21 vs analyst estimates of $0.12 ($0.09 beat)
- Free Cash Flow of $61.9 million, down 65.9% from the previous quarter
- Gross Margin (GAAP): 76.2%, up from 75.2% in the same quarter last year
- Global Monthly Active Users: 465 million, up 32 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 very strong, averaging 37.6% annually. This quarter, Pinterest reported mediocre 6.32% year-on-year revenue growth, roughly in line with what analysts were expecting.
Ahead of the earnings results, analysts covering the company were projecting sales to grow 10.7% over the next 12 months.
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.
Pinterest has been struggling to grow its monthly active users, a key performance metric for the company. Over the last two years, its users have declined 0.09% annually to 465 million. This is one of the lowest rates of growth in the consumer internet sector.
Luckily, Pinterest added 32 million monthly active users in Q2, leading to 7.39% 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's ARPU growth has been impressive over the last two years, averaging 14.9%. Although its monthly active users have shrunk during this time, the company's ability to successfully increase prices demonstrates its platform's enduring value for existing users. This quarter, ARPU declined 1% year on year to $1.52 per user.
Pricing Power
A company's gross profit margin has a major impact on its ability to extert 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 76.2% this quarter, up 0.9 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 $0.76 for every $1 in revenue to invest in marketing, talent, and the development of new products and services.
Gross margins have been trending down over the last year, averaging 75.1%. However, 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
Consumer internet businesses like Pinterest grow from a combination of product virality, paid advertisement, and incentives (unlike enterprise software products, which are often sold by dedicated sales teams).
Pinterest is efficient at acquiring new users, spending 44.7% 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 $107 million, resulting in a 15.1% margin. The company has also shown above-average profitability for a consumer internet business over the last four quarters, with average EBITDA margins of 13.3%.
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 $61.9 million in Q2, down 42.2% year on year.
Pinterest has generated $370.1 million in free cash flow over the last 12 months, an impressive 13.9% of revenue. This high FCF margin stems from its asset-lite business model and strong competitive positioning, giving it the option to return capital to shareholders or reinvest in its business while maintaining a cash cushion.
Key Takeaways from Pinterest's Q2 Results
Sporting a market capitalization of $19.8 billion, more than $2.3 billion in cash on hand, and positive free cash flow over the last 12 months, we believe that Pinterest is attractively positioned to invest in growth.
It was comforting to see that Pinterest topped analysts' revenue expectations this quarter, even if just narrowly, partly driven by a beat on global MAUs. That really stood out as a positive in these results. On the other hand, revenue growth was sluggish. Guidance for next quarter calls for high single-digit revenue growth year-on-year and low double-digit expense growth year on year. This means that the Q3 outlook for revenue and adjusted EBITDA are relatively in line. Overall, the results could have been better. The company is down 4.07% on the results and currently trades at $27.8 per share.
Is Now The Time?
When considering an investment in Pinterest, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter. We think Pinterest is a good business. Its revenue growth has been impressive, and that growth rate is expected to increase in the short term. 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 and its increasing ARPU shows the growing value of its platform.
At the moment Pinterest trades at 33.0x next 12 months EV/EBITDA. There's definitely a lot of things to like about Pinterest and looking at the consumer internet landscape right now, it seems that the company trades at a pretty interesting price point.
Wall Street analysts covering the company had a one year price target of $30.3 per share right before these results, implying that they saw upside in buying Pinterest even in the short term.
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