Pinterest Earnings: Advertiser Adoption Should Drive Higher User Monetization and Margin Expansion

We are maintaining our $36 fair value estimate on narrow-moat Pinterest PINS. The firm’s second-quarter results indicate that its network effect is strengthening as more advertisers adopt its ad performance measurement tools, which we think will increase ad prices and user monetization. At the same time, continuing user growth and improvements in engagement are providing more opportunities for advertisers to reach an audience.

Total revenue increased 6% (7% on a constant-currency basis) year over year to $708 million, driven by a 7% higher user count, with growth in both the United States and Canada (3%) and international markets (9%). The platform’s better content recommendations increased user engagement and more ad space was allocated per page, increasing ads sold by more than 30% from last year. However, while demand improved, average ad prices still declined 20% as some advertisers are waiting for additional proof regarding the firm’s ad performance measurement tools, while others remain hesitant due to economic uncertainties, which appear to be lifting.

Growth in revenue per user in the rest of the world segment (20%) and Europe (6%) outpaced the increase in the U.S. and Canada (2%). Non-GAAP operating margin improved nearly 180 basis points to 14.7% versus a year ago, driven by revenue growth, higher gross margin due to the firm’s more efficient utilization of Amazon’s cloud platform, and cost control which lowered R&D and G&A as percentages of revenue. Adjusted EBITDA came in at $107 million, a 15.1% margin, a 100-basis-point increase from last year.

Management expects third-quarter year-over-year revenue growth in the high-single-digit range and slightly higher than the second quarter. The firm guided to lower growth in operating expenses (low-single-digit range) which will expand margin, increasing the likelihood that its adjusted EBITDA margin for the full year will come in at around 20%, or 4 percentage points higher than last year.