Pinterest ‘PINS’ an Earnings Beat — Why the Stock Is Surging Friday

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A social media start-up needs to grow users, make more money per user and get to profitability.

Pinterest checks all boxes and the stock is up 19.04% to $27.39 a share Friday after an impressive earnings report.

Pinterest reported adjusted earnings per share of 12 cents, beating Wall Streets expected 8 cents. Revenue was $400 million against estimates of $371 million. Monthly active users grew 26% to 335 million, beating estimates of 331.3 million. Average revenue per user was $1.22, beating estimates of $1.14. Earnings before interest, tax and non-cash expenses were $77 million, beating estimates of $50 million.

The core drivers of the impressive quarter were all of what investors in a growth social media company look for:

User growth was strong. That’s a must.

Average revenue per user resulted from strong engagement. Management said it made some platform tweaks to improve the user experience, keeping eyeballs on the site and on advertisements. The company also improved its advertising product. Advertisers flocked to the platform, with the number of advertisers doubling over last year’s quarter.

Operating leverage was a key ingredient to the better-than-expected profitability. RBC Capital Markets analyst Mark Mahaney said research and development and marketing expenses saw impressive leverage (they were a lower percent of revenue).

For 2020, analysts are looking for Pinterest to see an operating margin of 3%, but for that to grow to 14% by 2021. Meanwhile, revenue and user growth, especially overseas, is still expected to continue growing aggressively.

While the stock trades at an expensive earnings multiple (above 300), that’s only because it’s ramping up profitability. It’s price-to-sales valuation is closer to 10 times, an appropriate valuation for this type of company. 

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