Pinterest's (NYSE: PINS) visual discovery tool has solidified itself as one of the go-to platforms for advertisers looking to reach potential customers in the travel, retail, and home design industries. With 367 million global monthly active users, there's no denying that Pinterest has built out a massive online space that connects people to ideas, content, products, and brands they may be interested in.
But despite Pinterest's size, the stock hasn't reaped rewards for investors. Since going public in April 2019, the company's share price has gained just 9% (from its opening price) compared to the S&P 500's 12% increase.
Image source: Pinterest.
You can't judge a successful investment by the company's first-year market performance alone, of course, but it does raise two questions: Why has Pinterest failed to beat the market, and where is the company headed?
To understand where Pinterest is going, let's take a closer look at its most recent quarterly results and how the coronavirus pandemic is affecting the company.
A slow start to a potentially bad year
Pinterest's sales increased 35% in the first quarter of 2020 to $272 million, which beat out Wall Street's consensus estimate of $270 million. But it missed slightly on the earnings side, with a reported loss of $0.10 per share versus the consensus estimate of $0.09.
Investors weren't happy with the first-quarter results, and the stock slid about 15% in the immediate aftermath. But the sell-off may not have stemmed only from the bottom line miss. The company's net loss widened significantly from $41.4 million in the prior-year period to $141.2 million.
Pinterest said in a press release: "Our cost of revenue has generally grown with users rather than revenue, which in this environment puts some pressure on gross margins." In other words, its cost of growth is eating into its profitability.
That could be cause for concern with any company over the long term, but it's even more problematic for Pinterest right now due to the pandemic. Pinterest makes its money from advertising on its platform, and with many retail and travel companies still reeling from COVID-19, its revenue will likely suffer this year.
Like many other companies, Pinterest isn't offering full-year guidance for 2020. And while it experienced some bright spots in the first quarter -- like average revenue per use growing 18% in the U.S. -- investors may want to temper their expectations for Pinterest over the next year as the coronavirus takes a toll on economies around the world. Analysts expect revenue to increase just 11% this year compared to over 50% in 2019.
Where will Pinterest be in a year?
Pinterest's shares have jumped about 50% over the past three months, but most of those gains have come from the stock simply rebounding, along with the broad market, from the March sell-off when pandemic fears first hit the U.S.
Investors became more optimistic about Pinterest when Facebook announced earlier this month that it was shutting down Hobbi, a Pinterest rival. That's good news for the smaller platform, of course, but it's not enough to paint a rosy picture for the company over the next 12 months.
The fact of the matter is that the pandemic's effect on the U.S. and global economies will negatively impact Pinterest over the next year. The company relies on advertising for its revenue, and as consumers cut back on spending, advertisers are likely to cut back on their spending as well.
The U.S., which accounted for 87% of the top line in the first quarter, has an unemployment rate of 11% as of this writing. Hopes of a quick economic recovery have begun to fade as the virus continues to flare up across the country.
Pinterest may still turn out to be a good long-term investment. If the social media platform eventually narrows its losses, is able to continue growing advertising revenue at a healthy clip, and the U.S. economy turns around faster than expected, then maybe shareholders will see additional near-term gains. But as it stands now, Pinterest investors are likely to be in for a rough patch over the next year.
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