Early in April I thought that shares of Pinterest (NYSE:PINS) were stabilizing with a potential catalyst at play. This came as shares had seen a recovery in recent weeks alongside the rest of the technology sector, as investors were anticipating and applauding cost-cutting efforts.
While some operating leverage was likely seen in 2023, the question was how much, as execution is badly needed to unleash potential. But unfortunately the badly needed execution is still not seen today with few signs of operating leverage being visible as of today.
A Recap
Pinterest is a bit of a strange animal in the social media landscape, but it has two massive advantages if you ask me. For starters is that the company employs a “pull” model instead of a “push” models which makes the platform less susceptible to potential more stringent actions, potentially taken by regulators, legislative bodies and consumer groups. Moreover, the company has a huge international user base which is very under-monetized, which creates for a compelling set-up.
Pinterest was a $20 stock in the 2019s when shares fell to their teens amidst the outbreak of the pandemic as investors feared the worst. This was followed by a spectacular recovery to highs in their $80s early in 2021. This came as investors were pricing in much higher usage by users under those circumstances, with advertisers happy to engage platforms like Pinterest to drive business, allowing the platform to post year-over-year growth rates in excess of 100% at some point in time in 2021!
That boom in the share price and a reversal of pandemic trends made that shares fell to the $20 mark in 2022, not just amidst concerns on slower growth, but more over serious deleveraging, as notably that aspect actually invited activist investor Elliott Management to take a stake in the business.
Establishing A Base
In February, the company posted a 9% increase in full year sales to $2.80 billion as the growth rates came in at just 4% for the final quarter of the year. Growth was driven by a combination of a 4% increase in the monthly actual user base to 450 million members, with ARPU up 10% to $6.36 per user (with the added comment that a change in the mix in the user base makes that the numbers do not add up to the reported sales growth). Note that the ARPU discrepancy remains huge with North American ARPU being up 16% to $24.38, and while ARPU rose by 49% in the rest of the world, it came in at just $0.49. In plain terms, a North American user on average generates an equal revenue number as 50 users in the rest of the world.
While revenues were up more than two hundred million in actual dollar terms, real operating deleverage was seen. A $326 million GAAP operating profit in 2021 turn into a loss of $102 million in 2022, a dreadful result.
With 675 million shares trading at $28, the market value comes in at $18.8 billion, although it still includes $2.7 billion in net cash, for a $16 billion enterprise valuation. The company guided for first quarter sales up by low single digits, which makes that I pegged revenues at $575-$600 million. Pegging expenses around $600 million, based on the commentary of management, I believed that break-even levels were in sight.
Investors were waiting until operating leverage was being displayed upon, certainly as the company was aiming to sublease its office space in San Francisco. The timing of such a move is terrible of course given the state of the office market, certainly in San Francisco.
Moreover, there was a potential trigger on the horizon as a potential ban on TikTok (one of the company’s toughest competitors) in certain Western nations might create a huge trigger. Sitting in a break-even position at $28, I was inclined to sell on rips, but would be happy to hold on to my position at the time.
Another Reset
After voicing a cautious upbeat tone in February, shares have fallen to the $20 mark in May following the release of the first quarter results, although that shares have recovered quickly to $24 and change here and today.
First quarter sales rose 5% to $603 million which was a bit stronger than guided for, as that looks solid. The issue is that a huge operating loss of $244 million was reported. That is a bit simplistic as well as that is caused in a big way by restructuring charges. Adjusted EBITDA, which was reported at $77 million in the first quarter of 2022, fell to just $27 million, but underlying weakness was seen on top of this. After all, the EBITDA number excludes a $143 million stock-based compensation expense, an expense which essentially doubled!
The second quarter guidance was underwhelming as well. While the company believed that sales growth would be in line with the pace of growth seen in recent quarters (mid-single digits), non-GAAP operating expenses are expected to grow in the low teens quarter-over-quarter, which is simply a terrible dynamic. With shares down to $24, the operating asset valuation has fallen to $13.6 billion, equal to about 4-5 times sales.
The issue remains with the outlook, notably the fact that expenses will increase, including an anticipated increase in stock-based compensation expenses.
It feels a bit as if the company is looking to drive user growth, but cuts costs at the same time, all while the advertising market is still facing some turmoil of course, making it very hard to read into the trends and underlying strategy.
And Now?
The reality is that I am a bit less upbeat than I was earlier. While the first quarter performance was in line with expectations, the outlook for the second quarter is disappointing as the pay-off from restructuring efforts is not really showing up yet.
Hence, I continue to be cautiously upbeat, based on the long term potential of the platform and company, but some real execution would be badly desired in the coming quarters, notably a combination of modest sales growth and real operating leverage on the bottom line.
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