Pinterest is down 71% from its peak – but remains expensive

Many investors don’t know what to make of Pinterest, especially with lower digital advertising demand and a high price-to-earnings (P/E) ratio.

Pinterest is a visual discovery social media platform where users can find ideas by creating pins and interacting with images.

It generates revenue from advertising by using promoted pins. Businesses can integrate their products into the Pinterest platform from which users can buy them.

Pinterest was co-founded by Bill Silbermann, Paul Sciarra, and Evan Sharp in 2009 and listed on the New York Stock Exchange (NYSE) in 2019.

The share price had a strong rally since its listing – rising from $24 to a peak of $89 at the beginning of 2021.

Since mid-2021, Pinterest lost its traction and declined to a low of $17 in June 2022.

Pinterest’s revenue has shown strong growth since 2017, which continued despite a decline in active users.

For the 2021 full year, Pinterest recorded a 52.3% increase in revenue.

Although its revenue growth has been strong, Pinterest has not been particularly profitable. The chart below shows Pinterest’s yearly net profit with a quarterly step.

Pinterest made significant losses from 2018 to 2019. However, it started to make quarterly profits in 2020 and recorded its first profitable year in 2021.

The profit performance growth started to slow from Q4 2021, and with its latest result in the second quarter of 2022, the earnings declined significantly.

Its Q2 earnings recorded adjusted earnings per share of $0.11 compared to the consensus forecast of $0.18. Quarterly revenue of $665.9 million compared to consensus estimates of $667 million.

Since Pinterest became profitable, it didn’t experience the growth and increasing profits investors expected from a newly listed social media company.

The reason for the disappointing performance can be traced back to the social media company’s user base.

Since mid-2021, Pinterest has started losing many of its monthly active users (MAU). In its latest reported quarter, it had no increase in its MAU.

User growth is an important metric for social media companies, and a declining user base can signal that users are losing interest in the platform, which can have dire consequences for the platform’s future.

These reasons, together with the high-interest rate environment, explain, to a large extent, why the stock has lost around 80% of its value in the trailing year.

Pinterest’s management has, in recent months, emphasised the importance of increasing the monetisation of its user base.

Pinterest has successfully implemented this strategy seen in its increased average revenue per user (ARPU) – aka revenue generated per customer over a specified period.

The overall trend of the ARPU since 2019 has been upward.

However, increasing the monetisation of Pinterest’s user base may decrease the user utility and further harm the user base.

At its peak in 2021, Pinterest’s price-to-earnings ratio was at 370 times. After the share price decline, it currently sits at 83 times earnings.

Comparing this to Meta’s P/E ratio of 11.7 times earnings, Pinterest still seems highly overvalued.