The stock market isn’t pretty, but this stock has a good outlook

Social media platforms always seem to find their name in the headlines. Popular topics such as the metaverse, e-commerce, photo sharing, and peer-to-peer communication are all powered by social networking.

One name that seems to consistently divide Wall Street is the image and video sharing website pinterest (PINS 0.45%). The company recently reported its fourth-quarter and full-year 2022 results. While Pinterest certainly has some work ahead of it, there are some interesting stats pointing to future tailwinds and growth prospects.

Were earnings really that bad?

For the quarter ended Dec. 31, Pinterest reported revenue of $877 million, a modest 4% year-over-year increase. For the year, Pinterest’s total revenue was $2.8 billion, up 9%.

While the company’s revenue growth seemed somewhat subdued, there’s more to it than meets the eye. Pinterest tracks its revenue and business metrics, such as active users, in the following geographic segments: US & Canada, Europe, and “rest of the world”.

According to the company’s investor presentation, Pinterest has done a fantastic job monetize its users in the rest of the world segment. Average revenue per user (ARPU) increased 21% in the fourth quarter and 49% for the full year.

Europe, on the other hand decreased 9% in the quarter and was only up 7% for the year. Management addressed this on the earnings call, attributing the headwind in Europe to currency volatility.

Image source: Getty Images.

When in doubt, zoom out

At first glance, investors may not be thrilled with the above growth rates. It is important to keep in mind that social media companies experienced abnormal growth during the peak of the COVID-19 pandemic. For this reason, the fact that Pinterest is generating any sort of growth, let alone growth across multiple regions, should not be discounted.

At the macro level, inflation is beginning to cool, but economists remain torn by the state of the economy as a whole. Although unemployment is close to a record low, much work remains to be done to keep inflation under control and avoid a potential recession. Despite these variables, investors learned during the earnings call that Pinterest’s board of directors had approved an up to $500 million share buyback program.

This move indicates that management believes the stock is undervalued, making buybacks a good form of capital allocation. In other words, while companies like Microsoft, AlphabetAnd Amazon laying off employees to preserve capital and invest internally, Pinterest uses its cash flow to buy back stock and reward shareholders.

Some things to keep in mind

It’s no secret that the stock market, and especially the Nasdaqis off to a flying start in 2023. Cautious investors should do what they can to avoid potential meme-stock euphoria and stay focused on a company’s underlying fundamentals.

In general, in times of economic uncertainty, it is not uncommon for large companies to identify smaller targets to potentially acquire. Smaller companies can offer new growth opportunities while also trading at attractive valuations. In Oct. 2021, e-commerce giant PayPal reportedly considering a takeover of Pinterest for about $45 billion. At the time of writing, Pinterest’s market cap is just $17 billion.

Pinterest has expanded its business in multiple segments over the past year and a half, but the market valued the company at nearly a third of its rumored price as Paypal considered an acquisition, And as Pinterest experienced unprecedented growth due to the pandemic.

As the company continues to generate growth in a time of widespread economic uncertainty, coupled with a generous share buyback program, investors may want to take a closer look at Pinterest’s shares. Regardless of its status as a takeover target, the company offers a solid long-term investment proposition. Current shareholders have the opportunity to potentially reduce their cost base, while new investors can start a small position while taking advantage of the attractive valuation.