Though it's understandable that Pinterest's (PINS) Q1 report would spark profit-taking following a decent post-IPO run-up, the numbers it shared aren't as bad as its post-earnings plunge might lead investors to presume.
Pinterest's Results and Guidance
On Thursday after the close, Pinterest reported Q1 revenue of $201.9 million (up 54% annually) and non-GAAP EPS of negative $0.32. Revenue beat a consensus estimate of $200.7 million. EPS officially missed a consensus of negative $0.11, but it's worth noting Pinterest's non-GAAP net loss ($40.4 million) was smaller than analyst estimates, and that its GAAP operating loss of $44.8 million was actually below a guidance range (issued in its IPO filing) of $47.5 million to $50.5 million.
Regardless, Pinterest's full-year guidance appears to be the main culprit behind its selloff. The social image-sharing platform is guiding for 2019 revenue of $1.055 billion to $1.08 billion (up 40% to 43% annually) and an adjusted EBITDA loss of $45 million to $70 million. Revenue guidance is roughly in-line with a consensus of $1.07 billion, but adjusted EBITDA guidance is officially below a consensus of negative $28.4 million.
Pinterest, which went into earnings up 62% from a $19 April IPO price, and up 30% from its opening trade of $23.75, tumbled 13.5% to $26.70 on Friday.
Dissecting Pinterest's Profit Outlook
As some of those who have defended Pinterest following its Q1 report have pointed out, the company's full-year adjusted EBITDA guidance was actually close to what many analysts were projecting. Baird analyst Colin Sebastian noted "a few high-end estimates" skewed Pinterest's consensus numbers. Likewise, former Fidelity fund manager Gavin Baker observed that analysts who had been unable to talk with Pinterest's management about financial expectations often had much higher estimates than those who had.
Pinterest's guidance does nonetheless imply that its adjusted EBITDA loss will -- in spite of strong revenue growth -- be higher this year than it was in 2018, when it fell by more than 50% to $39 million. But it's worth keeping in mind here that (as CFO Todd Morgenfeld mentioned on the earnings call) 2019 is set to make large investments in fleshing out its ad offerings and sales force, and that many of these investments won't yield a major payoff until 2020.
Though international markets accounted for 71% of the 291 million monthly active users (MAUs) Pinterest had in Q1, they only produced 7% of its revenue. The latter figure could be much larger in a couple years' time, as Pinterest builds out its international sales force. The company began selling ads in 6 European countries in Q1, raising the total number of countries served to 13.
For now, Pinterest's international ARPU remains tiny. Source: Pinterest.
And looking more broadly at Pinterest's ad business, the company's efforts to create self-serve tools for launching and managing ad campaigns should eventually give it a lift, as should recent moves to sell video ads and (notably, given how often Pinterest is used to discover products) drive more e-commerce transactions. On the call, CEO Ben Silbermann forecast self-serve ad tools -- a field where social media peers such as Facebook (FB - Get Report) , Twitter (TWTR - Get Report) and Snap (SNAP - Get Report) have made large investments -- are only expected to become a "meaningful" revenue contributor in 2020.
Positive User Growth, U.S. Revenue and Expense Trends
While the company still has a lot of work to do to better monetize much of this user base, Pinterest is still growing this base at a healthy clip. MAUs rose 22% annually in Q1 to 291 million (above a consensus of 289 million), after have grown 23% in Q4. International MAUs grew 29% to 206 million, while U.S. MAUs grew 6% to 85 million.
Pinterest's user growth is still healthy. Source: Pinterest.
Likewise, while this figure is still much smaller than what many social media peers are reporting, Pinterest did grow its U.S. average revenue per user (ARPU) by 41% in Q1 to $2.25. Together with modest MAU growth, that helped U.S. revenue rise 51% to $187 million.
And though the company is investing heavily in both sales and marketing and R&D, its cost of revenue, which is tied in large part to cloud hosting expenses, remains at levels reasonable enough to instill confidence that Pinterest will be profitable in future years as it further grows its ARPUs. Pinterest's cost of revenue was equal to 36% of revenue in Q1, down from 39% a year earlier. For comparison, Snap's cost of revenue was equal to 61% of revenue.
The Big Picture
Pinterest went into earnings trading for over 19 times its 2019 revenue consensus. At that valuation, the company was dealing with a fairly small margin of error. I liked the company's IPO story and felt it was pretty reasonably valued back when it was pricing its offering in the teens, but with its stock above $30 going into earnings, Pinterest needed a truly stellar report to keep Wall Street happy, and it didn't quite deliver that.
Nonetheless, considering how much its profit guidance "miss" stemmed from a handful of analysts estimates, how much its bottom line is pressured in the near-term by investments unlikely to have a big impact until 2020, how much headroom it has to grow ARPU and how healthy its user growth and cost structure still look, Pinterest's first earnings report as a public company hardly merits pressing the panic button.