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Pinterest Stock Crash After Earnings: Was It Justified?

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Pinterest (NYSE: PINS) Second-quarter results reported on Thursday, July 29, disappointed investors. As a result, the stock collapsed more than 13% following the announcement. Although the company reported better-than-expected earnings and earnings per share, it reported lower than expected monthly active users, and that’s what led to the stock crash.

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This leaves some contributors wondering if the crash in Pinterest’s stock price was justified or if the sale was overblown. Let’s take a closer look at the results for the quarters and try to determine whether the drop in Pinterest’s stock price is the first or the final.

Three teenagers looking at their moveable devices.

Image source: Getty Images.

Reopening economies has a negative impact

Pinterest reported 125% revenue growth in the second quarter. Meanwhile, analysts had expected 106.5%, and Pinterest guidance forecast revenue growth of 105%. Revenue growth was boosted by big companies reducing their platform spending to get the word out as economies reopen.

The reopening is having an overall negative impact on Pinterest. As people spend more time away from home, they spend less time engaging with Pinterest. This trend resulted in a decrease in the number of monthly active users compared to the previous quarter, both from the US and internationally. In the US, where average revenue per user is more than 10 times that of international users, average revenue per user decreased by 7 million from the first quarter to the second quarter.

Similarly, MAU from outside the US decreased by 17 million from Q1 to Q2. So, while reopening economies is prompting advertisers to spend more on Pinterest, it is causing the company to ditch MAU — a worrying trend from a company that has been regularly growing MAU. The reversal panicked investors and is likely to be the reason for the massive sell-off that followed the announcement.

Was the sell-off in Pinterest’s share price justified?

A loss of 24 million MAU is a firm pill to swallow. Keep in mind that as of its most recent report, Pinterest has a whole of 454 million, and you’ll see that it has lost over 5% of its user base. Advertisers pay for individual access. The fewer people on your platform, the less advertisers will spend on your site. The impact of the MAU loss will final longer than the benefit from the revenue outperformance for one quarter.

Given the impact of losing MAU from the US alone, you can start to estimate the annual cost of Pinterest. Over the former four quarters in whole, Pinterest generated an average revenue per user of $18.86. If you multiply that whole by the 7 million MAU you lost from the US, you get an estimated annual decline of $132 million in revenue.

This doesn’t even represent the growth rate in ARPU from fiscal year 2020 to 2021. Applying this number, you’d estimate cost revenue of about $203 million annually. To put these numbers in more context, Pinterest generated $1.7 billion in profits in all of 2020. Those losses are significant in themselves, but what makes matters worse is that investors are items if MAU losses quit this quarter.

Not a coincidence, the estimated annual revenue loss of $203 million is about 12% of annual revenue and is about the alike as the 13% short sale in the stock price following the report.

Doing some math on the effects of MAU losses shows a pleasing reason for Pinterest’s share price to fall. The pleasing news for contributors is that these users still have Pinterest accounts. They just haven’t interacted with them in the final month. There is a possibility that they will re-engage with the application in the next few quarters as the weather cools and the initial pent-up demand for outdoor activities subsides.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of Motley Fool’s premium advisory service. We are diverse! Asking about an investment thesis — even if it’s our own — helps us all think critically about investing and make decisions that aid us become smarter, happier, and richer.


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