Pinterest’s Q1 FY24 Earnings: A Deep Dive into AI-Driven Growth and Long-Term Investment Potential

Pinterest (NYSE) is a visual search and discovery platform with over 500M Monthly Active Users (MAUs) who use the platform to find and save ideas for various interests, with the purpose of shopping for those interests later. As of my initial “buy” rating on March 15, Pinterest stock has outperformed, rising by 28.4%, significantly outpacing the S&P 500.

In Q1 FY24, Pinterest reported impressive earnings with revenue and Adjusted EBITDA growing 23% and 318% YoY, respectively, and MAUs hitting a record high of 518M. The company continues to leverage AI to deepen user engagement and build a personalized shopping experience, creating greater value for advertisers. Despite uncertainties in monetization outside the U.S., partnerships with Google and local sellers are set to unlock new opportunities. Based on these factors, I maintain a “buy” rating for Pinterest, projecting strong long-term returns over a 3-year investment horizon.

Q1 FY24 Earnings Highlights

• Revenue Growth: Revenue increased by 23% YoY to $740M.
• Adjusted EBITDA: Grew 318% YoY, indicating strong operational efficiency.
• MAUs: Reached a record high of 518M, growing 12% YoY.
• AI and Engagement: Continued focus on AI to enhance user engagement and shopping experience.
• Monetization: Partnerships with Amazon Ads and Google Ads Manager to drive monetization, especially in international markets.

Strategic Initiatives and Performance

1. Accelerating User Growth and Engagement

Pinterest’s strategy focuses on deepening user engagement through AI-driven personalization and human curation, particularly targeting Gen Z users. The platform’s success in attracting Gen Z, who represent 40% of users, is significant. Gen Z users are highly engaged, saving more content and finding value in curated boards and collages. As this cohort gains spending power, Pinterest stands to benefit from increased engagement and monetization.

2. Improving Monetization

Pinterest is enhancing actionability for items on the platform through Mobile Deep Linking, Direct Links, and improved ad measurement capabilities. This strategy drives higher ROI for advertisers and attracts performance budgets. The company is also re-orienting its sales functions to educate advertisers on best practices, fostering deeper adoption and value capture.

3. Expanding Audience Reach and Monetization through Partnerships

Pinterest is scaling demand with Amazon Ads in the U.S. and Google Ads Manager to gain market share in international markets. With 73% of its user base outside the U.S., there is significant potential for monetization growth in Europe and RoW. Current ARPU in these regions is low ($0.86 in Europe, $0.11 in RoW) compared to the U.S. ($6.05), but partnerships aim to unlock this potential.

Challenges and Risks

1. Adjusted EBITDA Margin Contraction

Despite a YoY increase, Adjusted EBITDA margins shrank sequentially due to rising costs and lower ARPU globally. This could be due to seasonal factors and acquiring new MAUs in less monetized regions. Continuous monitoring of international monetization strategies is essential to avoid short-term profitability issues.

2. Macroeconomic Uncertainty

The uncertain U.S. economic landscape poses risks. Tight financial conditions and a weakening labor market could impact consumer spending, MAU growth, user engagement, and ad impressions, leading to declining ARPUs and margin pressures.

Valuation and Long-Term Outlook

Revenue and Profitability Projections

For Q2 FY24, Pinterest expects revenue growth of 18-20% YoY and non-GAAP operating expenses of $500M. Adjusted EBITDA is projected to be $157M, translating to an 18.6% margin, an improvement of 360 basis points YoY. Over 3-5 years, Pinterest aims for mid-high teens revenue growth and Adjusted EBITDA margins in the low 30s.

Valuation Model

Based on consensus estimates, Pinterest is expected to grow its revenue in the high teens in FY24, mid-teens in FY25, and low-teens in FY26, generating $4.75B over this period. With projected Adjusted EPS of $2.21 in FY26, discounted to a present value of $1.83, Pinterest should trade at a PE ratio of 34, higher than its current forward PE of 19.8 for FY26. This results in a price target of $62, representing a 42% upside from current levels.

Conclusion

Pinterest is well-positioned for long-term growth, driven by AI-led user engagement, Gen Z adoption, and strategic partnerships to enhance monetization. Despite short-term challenges, the company’s strong execution under William Ready’s leadership and focus on delivering value for users and advertisers support a “buy” rating. Assessing the potential for long-term upside, Pinterest is expected to continue driving significant returns over a 3-year investment horizon.