Shares of image-browsing platform Pinterest(NYSE: PINS) tanked on Friday after the company reported financial results for the third quarter of 2024. As of 11:15 a.m. ET, Pinterest stock was down 15% and approaching 52-week lows. And investors could be perplexed by this, considering its Q3 financial results beat expectations.
For context, Pinterest had 537 million monthly active users at the end of Q3, an all-time high. And higher revenue per user led to 18% year-over-year revenue growth. Moreover, it had net income of over $30 million, which was higher than expected.
However, Pinterest's ad pricing fell by 17%, and that's why the stock tanked today.
What does ad pricing have to do with anything?
Pinterest generates revenue by displaying advertisements alongside the images that its users browse through. Advertisers compete for these slots, and pricing is ultimately determined by supply and demand. But in Q3, supply far surpassed demand, leading to a 17% drop in the average price per ad.
Pinterest still grew revenue because its ad impressions increased by an enormous 41% -- the amount of times users saw an ad. Granted, some of this is justified by its 11% user growth. But it's clear the company muscled its way to revenue growth by simply increasing the frequency of ads, which isn't ideal. It would be far better if revenue had gone up because demand from advertisers was surging.
It's not all doom and gloom
Pinterest is far from a dying business. Monthly user trends are strong, and it's a profitable company. Moreover, management just authorized a new $2 billion buyback program, which will be more effective now that the stock is down.
That said, investors can rightly question sustainability at Pinterest. It can't continue to increase ad impressions at this rate -- eventually, users could feel bombarded. The platform has long held a lot of promise, but shareholders will want to see monetization growth from better pricing in the future.
Should you invest $1,000 in Pinterest right now?
Before you buy stock in Pinterest, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Pinterest wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $912,352!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. TheStock Advisorservice has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of November 4, 2024
Jon Quast has positions in Pinterest. The Motley Fool has positions in and recommends Pinterest. The Motley Fool has a disclosure policy.
