As the 14th-largest social network globally, Pinterest Inc. (PINS, Financial) is designed to provide inspiration to its 433 million monthly active users. Similarly, the company "inspired" investors on Monday with its earnings release for second quarter of 2022, which was not as bad as expected.
In addition, activist investment firm Elliott Management, which was founded by Paul Singer (Trades, Portfolio), revealed it has taken a 9% stake in the company and is now its largest shareholder. With approximately $55 billion in assets under management, the firm believes Pintereset has "significant potential for growth."
According to a press release, representatives of Elliott Management said, "As the market-leading platform at the intersection of social media, search and commerce, Pinterest occupies a unique position in the advertising and shopping ecosystems."
The stock has risen a substantial 22% over the past five days. However, it previously declined by around 77% since July 2021 on the back of an unfavorable environment for growth stocks and slowing growth.
In this discussion, I will break down the recent earnings report and dive into the valuation.
Low expected earnings
Leading up to the release of Pinterest's second-quarter results, expectations were at rock bottom. This was due to heavy competition from TikTok and a pullback in advertizing spend caused by recession fears. We have even recently seen Meta Platforms' (META, Financial) Facebook have slowing user growth and rising costs.
In addition, the high interest rate environment has squeezed the valuation multiples of growth stocks. The San Francisco-based company sits at the heart of these headwinds, but Pinterest still managed to crank out $665.90 million in revenue, which was up a healthy 9% year over year and only $1.1 million less than the $667 million projected by Wall Street.
The number of global monthly active users declined by 5% year over year to 433 million, which was not great but still not as bad as analysts' expectations of 431 million and better than the prior quarter's 9% decline.
Average revenue per user also started to recover, increasing 19% year over year from $4.87 to $5.82 in the U.S. and Canada. This was also higher than the $4.98 generated in the first quarter of 2022.
Adjusted Ebitda was $92 million, which represented a solid 19% increase over the $77 million produced in the prior quarter. However, it was still down by 48% compared to the $178 million recorded in the second quarter of 2021.
Its adjusted Ebitda margin also followed a similar pattern, increasing by 1% quarter over quarter to 14%, but down substantially from the 29% produced in the prior-year period.
Investing for the future
Despite the growth headwinds, management was still investing strongly. Sales and marketing investments increased 28% year over year to $192 million. This expense now makes up 29% of revenue, which is an increase over the 25% in the second quarter of 2021.
Management also boosted research and development investments to $152 million, up a substantial 36% year over year. This expense now makes up 23% of revenue, an increase from 18% a year ago.
The fact management has increased Pinterest's investments despite slowing growth and many headwinds is a testament to their aggressive style. CEO Bill Ready believes strong investment into visual-based shopping and e-commerce tools will be a key to the company’s future success.
This strategy could pay off since Pinterest research found 75% of its users who are active weekly state that they are “always shopping” or “love shopping.” Pinterest acts as a visual search engine and a platform where users can transition from “inspiration to realization.” Its demographic of 60% female users use the platform for fashion tips, travel inspiration and even home decor ideas. Its users have plenty of items to choose from as product uploads doubled worldwide in 2021 in the U.S. and quadrupled in international markets.
Pinterest launched an application programming interfacefor shopping, which allows real-time product pricing and availability to be included inside a shopping pin. This is an important feature as it allows trust to be built with the customer. The company is also planning to launch an “Amazon style” shopping page called “Your Shop,” which tailors personal product recommendations to each user. These are all strong tactics that should drive higher revenue per user moving forward.
Pinterest’s research and development investments are also helping to boost its entry into the metaverse. The company has announced a series of augmented reality solutions, including a Try On feature that allows users to test how furniture would look in their homes. In addition, there are Try On features for beauty products like lipstick and eye shadow.
The ability to forecast trends is a unique aspect of the Pinterest platform. Many social media platforms tend to be backward-looking, whereas Pinterest truly is at the cutting edge. The “Pinterest Trends” tool is very enticing to advertizers and even product designers as they can use it to dial in marketing tactics.
Shares of Pinterest are trading with a price-earnings ratio of 5.69, which is significantly cheaper than historic levels.
The GF Value Line indicates a fair value of $63 per share based on historical ratios, past financial performance and future earnings projections. Thus, the stock is significantly undervalued with a $23 share price at the time of writing.
Pinterest is a unique social media company, which I believe is more like a visual search engine. The company has huge potential in online shopping and the platform is truly a place for “good vibes,” which is different to other platforms.
The second quarter was better than expected and management is pursuing an aggressive strategy for growth. The stock is undervalued but still speculative in my eyes. Time will tell if management can successfully execute its plans.