Pinterest ($PINS) may need to ramp up its growth efforts in the upcoming first quarter to align with Wall Street’s expectations, as highlighted by RBC Capital Markets last Friday. Following the release of its third-quarter results, which exceeded projections, Pinterest indicated an anticipated revenue growth of 15% to 17% for the fourth quarter on a year-over-year basis.
This marks a deceleration from the 18% surge reported for the recently concluded three-month period. On Friday, Pinterest's shares experienced a drop of 17%, contributing to a total decline of approximately 24% in value for the year to date. The latest quarterly results showed a pattern similar to the previous quarter, where a modest downward guidance led to a significant market reaction, which RBC analyst Brad Erickson believes is excessive.
He mentioned in a communication with clients that the deceleration suggested in the outlook, combined with potentially more challenging comparisons in the first quarter, might appear daunting to investors. The guidance provided by Pinterest aligns with its long-term compound annual growth rate, which includes contributions from third-party services that the company will begin to compare against in the coming year.
Consequently, it may be necessary for Pinterest to enhance its growth by 300 to 500 basis points in the first quarter to keep pace with the anticipated gains from competitors such as Amazon.com ($AMZN) and Alphabet’s ($GOOGL) Google, in order to meet market expectations, as noted by RBC. Erickson also expressed concerns over the ongoing issue of value creation lagging behind value capture, stating that investor patience with the management's assurances of performance improvements may be wearing thin, especially given that these improvements have yet to translate into notable financial gains. While Pinterest showcased enhancements to its platform, such as significantly increased clicks from direct links to advertisers for the fourth consecutive quarter, RBC raised questions regarding how the company aims to monetize its new advertising initiatives. The company highlighted that it is capturing 5% of total advertising budgets from some of its largest advertisers and 10% from their digital budgets.
However, RBC's analysts found management’s cautious optimism regarding the adoption of new tools somewhat reserved when pondering the broader customer base's willingness to pay for the enhanced value by the start of 2025. For the fourth quarter, Pinterest projects adjusted operating expenses to increase between 11% and 14% year over year.
The combination of this forecast and a third-quarter earnings beat before interest, taxes, depreciation, and amortization underscores the efficiency of Pinterest's business model and suggests significant growth potential if revenue trends upward, as noted by Erickson. RBC maintained its outperform rating on Pinterest's stock, setting a price target of $48, suggesting that the improvements in the advertising platform are undervalued and have yet to be fully recognized by the market..