Social media platforms always seem to find their names in the headlines. Hot topics such as the metaverse, e-commerce, photo sharing, and peer-to-peer communications are all facilitated by social networking.
One name that seems to consistently divide Wall Street is image- and video-sharing website Pinterest (PINS 0.45%). The company recently reported results for the fourth quarter and full-year 2022. While Pinterest certainly has some work cut out for it, there are some interesting metrics that point to future tailwinds and growth prospects.
Were earnings really that bad?
For the quarter ended Dec. 31, Pinterest reported $877 million in revenue, a modest increase of 4% year over year. For the year, Pinterest’s total revenue was $2.8 billion, up 9%.
Although the company’s revenue growth appeared a bit muted, there is more there than meets the eye. Pinterest tracks its revenue and operating metrics such as active users across the following geographic segments: U.S. and Canada, Europe, and “rest of world.”
According to the company’s investor presentation, Pinterest has done a stellar job in monetizing its users in the rest of world segment. Average revenue per user (ARPU) was up 21% during the fourth quarter and 49% for the year.
By contrast, Europe decreased 9% in the quarter and was only up 7% for the year. Management addressed this during the earnings call and attributed the headwinds in Europe to foreign-exchange volatility.
When in doubt, zoom out
At first glance, investors may not be totally enthused with the growth rates above. It is important to keep in mind that social media companies experienced abnormal growth during the peak of the COVID-19 pandemic. For this reason, the fact Pinterest is generating any form of growth, let alone growth across multiple regions, shouldn’t be discounted.
At a macro level, inflation is beginning to cool down, yet economists remain torn on the state of the overall economy. While unemployment is near record lows, there is still a lot of work to be done to control inflation and avoid a potential recession. Despite these variables, during the earnings call, investors learned that Pinterest’s board of directors approved a share repurchase program up to $500 million.
This move signals that management believes the stock is undervalued, making buybacks a good form of capital allocation. Stated differently, while companies like Microsoft, Alphabet, and Amazon are laying off workers to preserve capital and invest internally, Pinterest is using its cash flow to buy back stock and reward shareholders.
Some things to keep in mind
It is no secret that the stock market, and particularly the Nasdaq, is off to a hot start in 2023. Prudent investors should do what they can to avoid any potential meme-stock euphoria, and stay focused on the underlying fundamentals of a business.
Generally speaking, during times of economic uncertainty, it is not uncommon for large companies to identify smaller targets to potentially acquire. Smaller companies may offer new avenues for growth while trading at attractive valuations as well. In Oct. 2021, e-commerce giant Paypal reportedly considered an acquisition of Pinterest for around $45 billion. As of this writing, Pinterest’s market capitalization is just $17 billion.
Pinterest has grown its business across multiple segments over the last year and a half, yet the market values the company at nearly one-third its rumored price point when Paypal mulled a takeover, and when Pinterest was experiencing unprecedented growth tailwinds from the pandemic.
Given the company is still generating growth during a time of widespread economic uncertainty, coupled with a generous share buyback program, investors may want to take a closer look at Pinterest stock. Regardless of its status as an acquisition target, the company offers a solid long-term investment thesis. Current shareholders have the chance to potentially lower their cost basis, while new investors can start a small position while taking advantage of the attractive valuation.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Adam Spatacco has positions in Alphabet, Amazon.com, and Microsoft. The Motley Fool has positions in and recommends Alphabet, Amazon.com, Microsoft, PayPal, and Pinterest. The Motley Fool recommends the following options: short April 2023 $70 puts on PayPal. The Motley Fool has a disclosure policy.