It isn't easy being an ad-supported social media network these days. Shares of Pinterest (NYSE: PINS) recently fell more than 15% after the company reported first-quarter earnings.
Usage of the site is up, but fear of a global recession is still pressuring ad sales. Plus, the company had to deal with some big restructuring costs. As a result, Pinterest's operating income swung from a modest gain in the fourth quarter of last year to a heavy loss of $244 million in the first quarter of this year.
Pinterest's increasing losses are disturbing, but this is still the most popular place on the internet for seeing things you want to spend money on. Selling the stock now could prove to be a costly mistake you never forgive yourself for. Before you do anything rash, let's look a little closer at recent results.
Pinterest hit hard by restructuring charges
Pinterest is not a growth-at-all-costs business. Bill Ready, the new CEO who was anointed last summer, is laser-focused on cost controls. To this end, he announced a 4% staff reduction in February. About a month later, the company ended a heap of office leases that it probably doesn't need now that it's more flexible about having employees work from home.
Pinterest's recent restructuring efforts will lower expenses over time, but they cost the company $121 million in the first quarter. While it probably shouldn't have hired the extra employees and leased the extra office space in the first place, these are nonrecurring charges.
Patience could pay off
Total monthly active users on the Pinterest platform peaked during the lockdown phase of the pandemic and then dipped near the end of 2021. The 463 million global monthly active users at the end of March was below the company's all-time peak, but it was 7.6% more than the company reported a year earlier.
The first quarter of 2023 wasn't easy for social media businesses that rely on advertising. Pinterest's unique position as the place people go to discuss their shopping intentions allowed it to grow revenue while many of its peers were in decline. Average first-quarter revenue per user in the U.S. and Canada rose 2.6% year over year to $5.11 per user.
A little over one-fifth of Pinterest's monthly active users are located in the U.S. and Canada, but this region is responsible for more than four-fifths of total revenue. In other words, it's only begun monetizing Europe and the rest of the world, where the vast majority of its users live.
First-quarter revenue from Europe rose 12% year over year if we ignore the negative effects of a stronger U.S. dollar. This region has a lot of room to grow, too. The average user from Europe contributed just $0.74 of revenue during the first three months of the year. The rest of the world is even less monetized, with average first-quarter revenue of just $0.10 per user.
People visit Pinterest with a shopping mindset, but online shopping across international borders is still problematic for the vast majority of its users. A look at the recent success of Global-E Online, a company partnered with Shopify to facilitate cross-border e-commerce, suggests it's just a matter of time before all geographies begin to resemble the lucrative U.S. market.
Investors can also look forward to increased monetization of traffic from the U.S. and Canada. On April 27, the company announced it would begin accepting ad demand from third parties and Amazon is its first partner.
Not a good time to sell
After seeing Pinterest's operation lose $244 million in the first quarter, you might be feeling a strong desire to cut your losses and walk away. That would probably be a mistake.
Third-party ads in the U.S. and Canada aren't rolling out until later this year. Along a longer timeline, new solutions for facilitating cross-border e-commerce will make it a lot easier to monetize relatively untapped groups of users. I'm probably not going to buy the stock until I see the company's bottom line swing back to profitability. That said, there's no way I'd let go of it right now. either.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Cory Renauer has positions in Amazon.com, Global-e Online, and Shopify. The Motley Fool has positions in and recommends Amazon.com, Global-e Online, Pinterest, and Shopify. The Motley Fool has a disclosure policy.