PINS tumbles 15% - What's Next?

Pinterest (PINS) stock tumbled 15% after the social media company reported first-quarter numbers that well exceeded expectations. Users rose 30%. ARPU rose 35%. Revenues rose 78%. Gross margins expanded over 850 basis points. The expense rate compressed 31 percentage points. Adjusted EBITDA margins expanded a good 35 percentage points.

But then where was the problem? Well, the management issued a weak Q2 guidance that called for user growth to slow dramatically over the next few months and this did not go well with the Street.

What is the worry?

The company ended the quarter with 478 million users, a year-over-year increase of 30%. While the number was slightly below market expectations, it was acceptable. However, user growth guidance was a bigger disappointment for the investors. Management is expecting monthly active users to grow in the low to mid-teens next quarter, and user growth in the US is expected to be around flat on a year-to-year basis.

Source: PINS

After the reopening gained steam in the second half of March, management observed deceleration in user growth, especially in the US, where the company has the biggest user base.

Where is the hope?

Growth was already decelerating in the company's biggest markets as the business expanded and matured. The pandemic caused an acceleration in growth, and now the reopening is leading to some deceleration. In our view, this is an expected outcome, so we need to look beyond it.

Revenue reached $485 million last quarter, growing by 78% year over year and representing an acceleration versus prior quarters.More so, the management is expecting revenue growth to be 105% in the second quarter of 2021.

Source: PINS

International markets are clearly the main growth engine for the company in terms of users. Advertising in international markets is growing very strongly, and it reached 20% of total revenue for the first time ever last quarter. The average revenue per user increased 50% in the US and 91% in international markets last quarter. International revenue per user is still very small in comparison to the US - $0.26 versus $3.99 - and Pinterest is just getting started with international monetization. We have plenty of room left to exploit here.

Source: PINS

Shopping could be a powerful driver for Pinterest as the number of users engaging with shopping surfaces on Pinterest grew over 200% in the 12 months ending March 31, 2021.On April 21, Pinterest announced an expansion of its partnership with Shopify (SHOP) to bring social commerce to 27 new countries.

Risks?

Pinterest, as with many other social platforms, faces an increasingly uphill battle to grow revenue at high rates as the fight for ad dollars intensifies. Pinterest’s business model focuses on selling advertising, which means its competition includes any locations where ads can be displayed. Direct competitors include Facebook and Alphabet which together account for upwards of 50% of digital ad spending, as well as, Twitter and Snap.

Pinterest’s path to profitability also holds the key as it requires either a huge increase in ARPU or significant reduction in expenses.

Our Stance?

Pinterest has already reached a massive scale, which is important to capitalize on the network effect and also to attract enough advertisers to the platform. Pinterest has lots of levers to pull in order to drive strong revenue growth from such a user base. We believe that PINS is an attractive opportunity accounting for the value of the platform and the future potential of the business.

PINS is a Buy at its current level ($66) and a Strong Buy under $62.26 support.

Stay tuned, as there will be more action next week.

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