3 Reasons Pinterest Could Soar on Earnings

Pinterest (NYSE: PINS) is set to deliver its third-quarter earnings report after hours on Wednesday, Oct. 28. The stock price has already been a big winner this year, up more than 400% from its bottom during the March crash and nearly 300% year-to-date. Still, there are a number of reasons to believe the stock could tack on more gains after the earnings report comes out.

Here are three reasons why Pinterest stocks could soar later this week.

1. Snap has paved the way

Snapchat parent Snap (NYSE: SNAP) posted blowout numbers last week, lifting the stock 28%, and it's continued to rally since then. The company's report was strong enough to lift the social media sector broadly as Snap delivered a 52% jump in revenue on 18% user growth.

A woman holding an iPad with a Pinterest board on it.

Image source: Pinterest.

Much of Snap's performance is related to improvements it's made, including adding new features like AR lenses and Bitmoji TV, streamlining its infrastructure and Android platform, and delivering more value advertisers, but the macro ecosystem also seems highly favorable to social media companies like Snap -- and Pinterest.

Screen time is up for people around the world, and with the rebound in the economy, advertising has sprung back to life too. Snap has a number of differences from Pinterest -- its user base skews toward Gen Z rather than millennial and Gen X women, and it offers a different experience -- but the rising tide of advertisers and users at Snap has likely played out similarly for Pinterest.

2. The Facebook boycott gave a lift

Dozens of major advertisers, including Disney, Unilever, and Nike, committed to boycotting Facebook in July over its alleged promotion of hate speech and anti-democratic misinformation, and some companies stuck with the boycott at least through September, including Nike, Coca-Cola, and McDonald's.

Pinterest, as a social media ecosystem focused on positivity and self-improvement, was poised to benefit, and management's comments in the second-quarterearnings callconfirmed that: Revenue in July was up about 50% through July 29 (when it reported), indicating a meaningful tailwind from the Facebook boycott. However, the company called for revenue growth for the full quarter in the mid-30% range, indicating a projected slowdown in year-over-year growth to 27% in August and September.

That forecast seems to be conservative given the lingering effects of the Facebook boycott, which may be intensified by the election season, and management acknowledged on the earnings call that it believed a majority of the accelerated growth in July owed to product improvements rather than tailwinds from the boycott.

Separately, Pinterest became the most downloaded free app on Apple smartphones for a period in September as interest spiked around the customizable home screen in iOS 14, boding well for usage and the underlying business -- and offering another reason to believe it will top estimates.

3. The sky's still the limit

Despite having more than 400 million monthly active users, Pinterest's market cap is still smaller than both Snap's and Twitter's, which have fewer users -- though they report their users on a daily basis, rather than monthly.

The success of Facebook, now sporting a market cap of around $800 billion, also shows the potential of social media apps like Pinterest if they can build audiences that engage consistently with the platforms. Pinterest is just starting to monetize its platform and has a number of advantages over its competition, including that its users actually want to see ads because they are looking for information on things like weddings, home decor, and activities for children. Many of Pinterest's users come to the site with the intent to purchase something, making it an especially desirable platform for advertisers.

Though the company experienced a setback in the advertising business in the second quarter, that seems to be well in the past now given its strong growth numbers in July. Increasing engagement during the pandemic combined with an American consumer that has a surprising amount of money to spend -- retail sales are again on the rise -- could be a perfect mix for the company.

Analysts have modest expectations for the third quarter, calling for 35% revenue growth and earnings per share of $0.02, up from a penny a year ago. If Pinterest tops those numbers, the stock could soar the way it did after its second-quarter report.

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