Tech-oriented growth stocks have found their footing again after a year-long decline that saw the Nasdaq Technology Sector index lose 40% of its value last year. So far in 2023, though, it is outpacing the S&P 500‘s gains by better than two-to-one.
Yet Pinterest (NYSE: PINS) hasn’t joined in on the rebound. Even though its stock lost a third of its value last year, shares are only up 1.7% so far this year, and its recent fourth-quarter earnings report was a disappointment that sent the stock lower.
It wasn’t supposed to be this way as Pinterest is a site perfectly primed to attract advertisers. With an installed base of 450 million monthly active users around the world essentially primed to buy, the ideas collating website should be raking money in. But it’s not, as GAAP net losses were $96 million for the year.
Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) for 2022, however, were $425 million, and Pinterest did post a $17 million GAAP profit in the fourth quarter, so let’s see whether this stock is buy.
Spinning its wheels
I’ve long liked Pinterest’s positioning in the battle for ad dollars. Admittedly it’s going up against giants like Alphabet‘s (NASDAQ: GOOG)(NASDAQ: GOOGL) Google and Meta Platforms‘ (NASDAQ: META) Facebook, though certainly in the latter case where ads are shoe-horned into the structure rather than being organically present, Pinterest seems a better bet for advertisers.
And consider the results. Where Pinterest saw revenue — which comes almost wholly from advertising — grow 4% in the fourth quarter to $877 million and was 9% higher for the year at $2.8 billion, Meta suffered a 4% and 1% decline, respectively, in quarterly and yearly revenue.
Yet Pinterest is either barely profitable or turning in losses, while Meta generated a $23 billion profit and Alphabet had profit of over $21 billion. A large share of the blame for Pinterest’s situation therefore needs to be pinned on management, which is siphoning off whatever value the social media platform generates in the form of stock-based compensation.
The only reason Pinterest was able to show adjusted profits for the year was because it ignored the massive amounts of stock-based compensation it paid to executives, nearly half a billion dollars’ worth. That’s not uncommon for companies trying to justify the compensation paid, but Pinterest is making it worse by authorizing a $500 million stock buyback program for 2023 in an attempt to offset the dilution it created. So any value Pinterest creates immediately gets sucked away to pay executives’ stock windfalls.
At the same time, its costs are skyrocketing. Revenue was up 4% in the fourth quarter, but expenses jumped 31%, especially in sales and marketing, which surged 66% from last year.
Not growing where it matters
Certainly Pinterest’s 450 million-strong user base is nothing to ignore, and it serves to underpin the foundation of the company’s potential. And though Pinterest got a big boost during the pandemic from people stuck at home, it was still able to increase their number 4% in the fourth quarter, which should ease concerns about the contraction it had been seeing. Average revenue per user (ARPU), however, only inched up to $1.96 from $1.93 a year ago.
That’s because it saw no growth in the U.S. and Canada, and only very modest growth in Europe. The real lift came from the broad “rest of world” category, but advertisers aren’t willing to pay from users outside of North America.
Where ARPU is $7.60 in the U.S. and Canada, it shrinks to $1.01 in Europe and is a negligible $0.14 in the rest of the world. So advertisers are willing to buy into the U.S. consumer, but Pinterest isn’t growing here, and where it is seeing growth, advertisers apparently don’t care.
Change is needed
Pinterest should be growing, and with 450 million monthly active users, it really should be solidly profitable at this point. Yet its primary market is stuck, it’s in an economic environment where advertising dollars are going to be harder to come by, and management is sucking away vital resources from the business to compensate its executives.
The online sharing site went public in April 2019 at $23.75 per share. At just $1 per share more today, the stock has essentially gone nowhere in four years, hardly worth the extravagant stock-based compensation executives are being rewarded with.
Until it reins in its costs, stops lavishing management with stock, and figures out how to grow its U.S. base again, I can no longer recommend Pinterest as a stock to buy.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Meta Platforms, and Pinterest. The Motley Fool has a disclosure policy.