Pinterest (NYSE:PINS)
The Pinterest stock price (NYSE:PINS) dropped by more than 18%. Without Snap (also down 18%), the Communication Services sector had the largest fall on Friday.
Pinterest’s first-quarter profits surpassed expectations, in contrast to Snap’s miss. Investors, however, were more concerned with the company’s projections, which showed no acceleration in sales growth during the second quarter and a double-digit rise in operating expenses.
Benchmark analyst Mark Zgutowicz drew another comparison with higher fliers in the digital ad sector, saying that cutting such expenditures in the second half would limit advances in market share and average revenues.
And we expect management’s expected S&M cuts on growth initiatives will only further mitigate the potential for digital market share gains, and subsequent [average revenue per user] languish relative to peers,” he said, contrasting META’s 1Q revenue acceleration with PINS’s.
He pointed out that the substantial spike in opex in Q2 places more risk on the second-half revenue and user trajectory, even though the business has reaffirmed its goals to enhance operating margin. While Pinterest’s growth is “materially weighted” toward the rest of the world, the company’s ARPU will continue to be diluted because of the company’s focus on attracting millennials and Generation Z users.
As the opex cost hikes reveal, the second half will face considerable pressure to improve margins, creating execution risk. The first quarter beat, but the Q2 forecast suggests revenue growth roughly 170 basis points below consensus amid “limited” visibility, as Citi’s Ronald Josey stated.
Nonetheless, “we are incrementally encouraged by strengthening engagement trends, Shopping progress given the mission to make every Pin shoppable,” as Josey put it. He still sees this stock as a high-risk Neutral choice with a $28 price target.
KeyBanc sounded optimistic, expressing that it was “still confident” in future margin growth.
Analyst Justin Patterson said, “While we suspect the 1Q result will likely invite some debate over the pace of improvement, we believe that: (1) solid time spent growth is creating more monetizable opportunities, like the new Amazon partnership, and (2) margin expansion is still on track when normalizing for expense shift from 1Q to 2Q.”
After the Pinterest stock drop on Friday, Patterson maintained an Overweight rating and set a $32 price target, representing a 43% upside from current levels.
Featured Image: Pexels @ Brett Jordan
