Thinking of Buying Pinterest? Stop and Do This Instead.

Pinterest (NYSE: PINS) stock bounced higher on Tuesday after the image-based discovery platform posted better-than-expected results in its first-quarter earnings report.

The social media stock easily beat top-line expectations as revenue rose 18%, or 15% in constant currency, to $1.01 billion, topping estimates at $968.1 million. Growth was driven by an 11% increase in monthly active users to 631 million, and average revenue per user was up 6% to $1.61 globally.

Adjusted earnings per share improved from $0.23 to $0.27, which beat the consensus at $0.22, and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) rose 20% to $206.5 million.

In its second-quarter guidance, the company called for revenue growth of 14%-16% to $1.133 billion-$1.153 billion, ahead of the consensus at $1.12 billion.

Investors cheered the report, but the enthusiasm for the results notably faded as the stock was up as much as 19% in pre-market trading before closing up just 7%.

While the report might seem encouraging, it's not enough to make the stock a buy.

Image source: Pinterest.

The case against Pinterest

In an era where investors are turning against software stocks that are overreliant on stock-based compensation, Pinterest looks increasingly vulnerable.

Yes, Pinterest isn't an enterprise or subscription-software company, which have found themselves in the sights of Anthropic and other AI start-ups, but it has many of the same risks. In a world of AI images, the need to find the real-world examples that Pinterest provides is diminished. AI slop also has the potential to drown out legitimate images on the platform, and users have been complaining about this.

Additionally, Pinterest's numbers aren't as strong as they look. The company was unprofitable in the quarter on a generally accepted accounting principles (GAAP) basis with an operating loss of $80.3 million. The first quarter is a seasonally slow period, but the GAAP loss is largely due to $231.4 million spent on share-based compensation, or roughly 23% of its revenue.

Pinterest spent $2 billion on share buybacks in the first quarter, and that could pay off down the road, but at its current rate of dilution, those repurchases will be erased in roughly 2 years, depending on the stock price.

Finally, while Pinterest is considered a growth stock and is still reporting decent growth numbers, it significantly underperformed the social media leader, Meta Platforms (NASDAQ: META), in the first quarter, and its growth was even slower than Google Search, showing that Pinterest is actually losing market share compared to the industry leaders.

A better choice

If you compare Pinterest's results to Meta's, it's hard to find a reason to favor Pinterest over its much larger rival.

Meta's revenue grew by 33% in the quarter, and it achieved that even with a mostly mature user base as its ad load, or the number of ads users see, rose 19%, and average price per ad was up 12%. Evidently, Meta is doing a much better job at monetizing its user base, compared to Pinterest's ARPU growth of just 6%.

In addition to the faster growth rate, Meta has much higher profit margins, with an operating margin of 41% in the first quarter, and the stock is significantly cheaper.

Based on GAAP earnings per share, Meta currently trades at a price-to-earnings ratio of just 22. Pinterest, on the other hand, is trading at about twice that price using GAAP earnings.

If Pinterest were growing faster than Meta, I could see paying up for the stock, but that's not the case. I currently own both of these stocks, but I plan to sell Pinterest when Motley Fool trading rules allow.

The company has now had several years to rebound from the post-pandemic hangover, and the recent results are underwhelming compared to its industry peers. There are better opportunities out there, including Meta.

Jeremy Bowman has positions in Meta Platforms and Pinterest. The Motley Fool has positions in and recommends Meta Platforms and Pinterest. The Motley Fool has a disclosure policy.