Pinterest ($PINS) may need to accelerate its growth starting in the first quarter to align with expectations from Wall Street, as noted by RBC Capital Markets on Friday. On Thursday, the popular image-sharing platform released its third-quarter results, which exceeded projections. The company predicts a fourth-quarter revenue increase of 15% to 17% year-over-year, reflecting a slowdown compared to the 18% surge reported for the recently concluded three-month period.
Friday's trading saw Pinterest's shares decline by 17%, bringing the year's total losses to about 24%. This latest report mirrored the previous quarter's performance, where a conservative guidance sparked a disproportionately large reaction, which RBC analyst Brad Erickson described as excessive in a client note.
The anticipated deceleration in growth, combined with potentially more challenging comparisons in the first quarter, may appear daunting to investors, Erickson stated. Pinterest's guidance suggests growth consistent with its multiyear compound annual growth rate, which includes contributions from third parties that the platform will begin to lap next year.
Consequently, the company might need to boost its growth rate by 300 to 500 basis points in the first quarter to keep pace with the growth rates expected for competitors like Amazon.com ($AMZN) and Alphabet's ($GOOGL) Google, according to the analyst's insights. Erickson highlighted that investors' patience seems to be wearing thin regarding the gap between value creation and value capture, with management's optimistic narratives about performance improvement yet to show tangible benefits.
Despite signs of progress — such as a more than doubling of clicks from direct links to advertisers for four consecutive quarters — uncertainties remain on how the company will monetize its new advertising initiatives, RBC analysts warned. While the firm indicated that it has reached a 5% share of total advertising budgets among its largest clients and 10% of those clients' digital budgets, management's cautious approach in defining the adoption of new tools as a multi-quarter development reflects hesitation about receiving adequate compensation for the increased value across a wider customer base, particularly in the lead-up to 2025, according to Erickson. The outlook for the fourth quarter anticipates adjusted operating expenses growing by 11% to 14% year-over-year, reinforcing the efficiency of the business model.
Erickson also pointed out that the strong earnings before interest, taxes, depreciation, and amortization during the third quarter indicates the potential for significant growth should revenue improve. RBC reiterated its outperform rating for Pinterest, setting a price target of $48 a share. It emphasized that the company represents an ‘underappreciated ad platform improvement story that has yet to demonstrate its full potential.’ Price: 27.97, Change: -5.96, Percent Change: -17.57.