Pinterest released its first quarterly earnings report as a public company after Thursday’s market close—and let’s just say the numbers left investors wanting. The social-media company’s stock plunged 17% in after-hours trading, and while it recovered a bit on Friday, the shares tumbled 13.5% from Thursday’s close to the end the week, at $26.70.
Pinterest (ticker: PINS) reported $202 million in sales and an operating loss of $38 million. Both numbers were actually better than Wall Street estimates. It was the full-year guidance that tripped the stock up.
Management expects about $1.068 billion in 2019 sales, while Wall Street predicted $1.070 billion. Although $2 million—just 0.2% of full-year revenue—shouldn’t be that big of a deal, all the problems that the weak guidance may imply, including slowing revenue and lackluster execution, certainly are.
In giving weak guidance, Pinterest violated a cardinal rule of earnings conference-call management. You always blow out the first quarter after an initial public offering or a big merger. If you can’t impress Wall Street out of the gate, then the Street will assume something ominous is brewing.
Pinterest management doesn’t see a looming problem, however. “We’ve seen an acceleration in the number of advertisers,” explained Chief Financial Officer Todd Morgenfeld on the company’s earnings conference call. “Our growth rate has accelerated through [the first quarter].”
Big publicly traded companies have many levers to pull when reporting figures for any given quarter. If such a company can’t beat Wall Street earnings estimates by a penny, then something must be really wrong, a longtime Wall Street analyst once explained to me. That’s why a company’s stock can drop a lot, even when it misses earnings estimates by just a little. Slowing growth is a big problem for high-growth companies, which means light sales guidance could be a red flag.
Pinterest’s first-quarter revenue grew 54%—far higher than the 6% of the tech-heavy Nasdaq Composite—and the company is valued at almost 11 times next year’s sales. Nasdaq companies, on average, fetch 2.5 times next year’s estimated sales.
That kind of valuation is only justifiable if Pinterest keeps the growth coming, but even then it isn’t much help. The valuation history of other social-media companies, such as Twitter (TWTR), Snap (SNAP), and Facebook (FB), doesn’t point to a target price for Pinterest. At similar points in their history, those three stocks traded for as low as eight times sales—and as high as 30 times.
Still, Pinterest doesn’t look like a broken stock. Its shares have gained as much as 80% since it set its IPO price at $19 on April 17. A pullback of some kind was probably inevitable.
Nor does it appear as if Wall Street is bailing on the stock because of its sales guidance. Some, like Nomura analyst Mark Kelley, contend that not much has changed for the stock, except for the assumptions that investors make. “Though the headline outlook may have missed the mark, we believe expectations have been broadly reset for the rest of the year and our view on the long-term drivers of the business remains intact,” he writes. Kelley rates the shares a Buy with a $38 price target.
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Others looked for the silver lining deeper in Pinterest’s release. “The number of advertisers accelerated, which we view as a positive forward indicator,” wrote Citigroup analyst Mark May.
We wouldn’t be surprised to see Pinterest trade back above $30 a share, where it was before the earnings release. But investors better hope it can deliver the goods the next time around, when it reports in August.
Pinterest may not get a second chance.
Write to Al Root at [email protected]