Will lower ad spend prompt a drop in the Pinterest share price?

After Alphabet and Meta reported soft Q4 numbers last week, a big question facing Pinterest was whether it too would be impacted by a lower ad spending environment. The company’s long-term focus is driving user engagement.

- Revenue for the October to December period grew just 4% year-over-year.

- Evercore ISI analyst Mark Mahaney expects the digital ad spend environment to remain tough for Pinterest.

- The major social media ETFs are weighted in favour of Meta.

Social media service Pinterest’s [PINS] fourth quarter (Q4) 2022 results sent shares tumbling after the bell on Monday.

Pinterest beat bottom line estimates, reporting earnings per share of $0.29 versus the $0.27 that analysts polled by Refinitiv had expected. A net income of $17m in the October to December period was overshadowed by a full-year net loss of $96m.

The company narrowly missed top line estimates. Revenue was up just 4% year-over-year to $877m, less than the $886.3m that analysts had expected. Revenue for the full fiscal year was up 9% to $2.8bn.

“While the industry as a whole is facing headwinds, we are adapting quickly to a changing macro environment and are committed to creating a more positive online experience for our users and advertisers”, Pinterest CEO Bill Ready said in a statement.

The Pinterest share price was down as much as 16.5% in after-hours trading, after having gained 14.9% year-to-date to its 6 February close at $27.89.

User engagement in focus

Early in December, Pinterest finally announced a partnership with Elliott Investment Management.

A board seat has been added for activist investor Marc Steinberg with a view to the two parties working on a strategy “to increase engagement with users” and “deepen monetisation per user”, according to a company press release.

Ahead of earnings, DA Davidson analyst Tom Forte was maintaining a neutral rating on the stock and a $21 price target. Though Pinterest could take market share away from Meta [META] and Twitter, Forte wrote that he’s waiting for the company “to reignite engagement growth.”

Engagement, which takes into account user interactions such as pins, comments and saves, was up 10%. Ready told Bloomberg in an interview on Tuesday that he prefers engagement to monthly active users, and referred to the latter as “a vanity metric”.

Average revenue per user (ARPU) for Q4 was $1.96, up from $1.93 in the year-ago quarter. ARPU for the US and Canada was up 6% year-over-year, from $7.17 to $7.60. ARPU in Europe fell 8.1%, but it was up 27.3% in the rest of the world.

Lack of advertising appetite a near-term challenge

While engagement and growth are the long-term focus, near-term headwinds are gathering force.

Last week, the social media site joined other big tech names in announcing layoffs. Around 150 jobs were cut, equivalent to almost 5% of employees, lower than the 13% reduction Meta made back in November, or Alphabet’s [GOOGL] 6% reduction of its global workforce. A spokesperson for Pinterest said that the move will “set us up to deliver against our company priorities and our long-term strategy”.

The downward pressures on digital ad spend will remain a challenge for the company for the foreseeable future, according to Mark Mahaney, head of internet research at Evercore ISI.

“Pinterest has some interesting innovations, but they’re doing them in a tough market … [P]eople will still buy Google and Meta, and there will be less appetite for the secondary platforms,” wrote Mahaney told Bloomberg.

Pinterest expects to report revenue growth in “low single digits” for Q1 2023, versus a growth rate of 6.9% expected by analysts.

Funds in focus: Global X Social Media ETF [SOCL]

The Global X Social Media ETF [SOCL] has allocated Pinterest 4.36% of its portfolio as of 6 February, making it the fund’s 11th-largest holding. Meta is the second-biggest holding, with a weighting of 11.45%. The fund is up 20.8% year-to-date, but down 20.8% over the past 12 months.

Pinterest is the fifth-largest holding in the Invesco Dynamic Media ETF [PBS] portfolio, making up 4.82% of the fund’s portfolio. Meta is the biggest holding and has a 7.12% weighting as of 3 February. The fund is up 21.1% year-to-date, but down 16.5% over the past 12 months.

The two stocks are also held by the Fount Metaverse ETF [MTVR]. Pinterest has a 2.61% weighting and Meta 4.05%. The fund is up 14.1% year-to-date, but down 23.1% over the past 12 months.

Prior to the earnings, analysts were somewhat mixed regarding their outlook on Pinterest shares, with seven ‘buy’ ratings and 11 ‘hold’ ratings. The consensus price target of $27.18, however, implies a 2.54% downside from the 6 February close, according to MarketBeat.