Pinterest (PINS) stock in cautious stance on users growth concerns

Pinterest Inc. (NYSE: PINS) stock has fallen over 25% since its initial public offering on April 18, 2019. The stock has been trading near the low of $17.39. Investors remained concerned about the company’s future due to a gradual rise in the monthly active users in the midst of the current tough competition in the advertising space.

The company has been facing immense competition in the advertising space from Facebook’s (NYSE: FB) Instagram, Twitter (NYSE: TWTR), Snap Inc. (NYSE: SNAP), and from other private players. Also, the deceleration in revenue growth rate adds more woes to the company’s future performance.

The company generates revenue by delivering advertisements on its website and mobile application. Revenue is recognized only after transferring control of promised goods or services to customers, which occurs when a user clicks on an ad contracted on a cost per click basis or views an ad contracted on a cost per thousand impressions basis.

Over the last several years, Pinterest experienced significant growth in its global monthly active users. Specifically, the company’s international MAUs have grown due to its focus on localizing content in international markets. The international user growth is expected to continue to outpace the US user growth in the near term.

Historically, the company has financed its operations primarily through sales of its stock and payments received from its customers. The company primarily uses cash for personnel-related costs and the cost of hosting its website and mobile application. As of September 30, 2019, Pinterest had $1.73 billion in cash, cash equivalents, and marketable securities.

The company believes its existing cash, cash equivalents and marketable securities and amounts available under revolving credit facility will be sufficient to meet its working capital and capital expenditure needs over at least the next 12 months.

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The active user growth rate is expected to fall over time if the size of the active user base increases or higher market penetration rates is achieved. The performance will increasingly depend on its ability to increase Pinner engagement and its monetization efforts when its active user growth rate slows.

For the third quarter, Pinterest reported a wider loss due to higher costs and expenses despite a 47% jump in the top line. The revenue missed analysts’ expectations while the bottom line exceeded consensus estimates. Global monthly active users grew by 28% to 322 million. Global ARPU grew 14% to $0.90. For the full year of 2019, Pinterest expects total revenues to grow 46-48% to a range of $1.10-1.11 billion.

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