Social media stocks have been bombarded this earnings season as growth rates slowed across the board, but there was one exception to the rule.
Whereas Metaplatforms and Instantaneous fell sharply on their respective earnings reports, pinterest (NYSE: PINS) jumped nearly 14% last Friday after its announcement in the third quarter. The company posted strong revenue growth, showed a return to user growth, and gave investors more reason to be excited about its future.
Let’s see why Pinterest is a buy after last quarter.
The growth story returns
Like other pandemic winners, Pinterest’s stock has fallen sharply over the past year. Revenue growth slowed sharply and the company was losing users at one point, with pandemic-era visitors leaving the platform once the economy reopened.
Pinterest’s 8% revenue growth in the third quarter isn’t going to impress growth stock investors, but it’s a solid result at a time when macroeconomic headwinds are clearly weighing on the digital advertising industry (all such as currency headwinds). At constant exchange rates, revenue increased 10% year-on-year.
More importantly, after several quarters of declining monthly active users (MAUs), the user base is growing again. MAUs were flat year-over-year at 445 million, but were up 3% from the prior quarter with solid growth in every region. The story of its peaking user base no longer applies, and MAU growth is expected to accelerate during the colder months of the year. On the earnings callmanagement also noted that the company would soon be phasing out a Google search algorithm update starting in November 2021, which would have impacted its ability to increase MAUs, paving the way for continued gains. .
Not only is the company starting to add new users again, but it is also continuing to better monetize them. Average revenue per user (ARPU) increased in all regions except Europe, where it fell 3%. Globally, ARPU increased 11% year over year to $1.54, and in North America, which generates the vast majority of revenue, it increased 15% to reach $6.13.
Finally, profitability is down substantially as the company continued to invest in new products and advertising tools despite slowing growth, but Pinterest still reported an 11% margin for adjusted results. earnings before interest, taxes, depreciation and amortization (EBITDA) in the third quarter in a difficult macroeconomic environment. Based on free cash flow (FCF), the company is also solidly profitable with FCF of $383 million in the first three quarters of the year, which equates to a 20% FCF margin.
Profitability on a generally accepted accounting principles (GAAP) base is expected to return as the company said it is committed to significantly increasing margins in 2023 and expects to complete an investment cycle in the fourth quarter. Management is also confident that Pinterest will be more resilient than its digital advertising peers in the holiday quarter.
Why this is a buy
Basically, Pinterest’s business is stronger than recent results indicate. Its platform is unique in that users are particularly open to seeing ads on Pinterest as part of their discovery and purchase process. The company can also offer advertisers a full funnel experience where they can build brand awareness, create demand, and sell product in one place.
It’s a sticky ecosystem for monetization, and the return of user growth shows the platform remains attractive.
Pinterest stock is down nearly 75% from its all-time high, and it now trades at a price-to-earnings ratio below 40 based on this year’s adjusted earnings-per-share estimate. The company’s earnings will almost certainly increase as ARPU improves, user growth returns, and macro headwinds eventually fade.
If the social media company can deliver accelerated revenue growth and rising profitability, the stock could skyrocket from there.
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Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a board member of The Motley Fool. Jeremy Bowman has positions in Meta Platforms, Inc., Pinterest and Snap Inc. The Motley Fool has positions in and recommends Meta Platforms, Inc. and Pinterest. The Motley Fool has a disclosure policy.
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