Pinterest (PINS Quick QuotePINS - Free Report) reported strong Q2 earnings and revenue on July 29 that propelled analysts to dramatically raise EPS estimates -- but the stock gapped down 18% the next day.

We'll explore reasons for the mismatch right after we look at the numbers...

PINS delivered Q2 adjusted EPS of $0.25, swinging from a loss of $0.07 per share a year ago and beating the analyst consensus of $0.13 per share by 92%.

The image sharing platform said revenue jumped to $613.2 million from $272.5 million in the year-ago quarter, vs expectations of $562.1 million, for a 9% topline beat.

Management guidance reiterated a projection for Q3 revenue to grow in the low-40% range year-over-year. The current Zacks revenue consensus of $627.6 million would represent growth of 41.7% vs Q3'20. And the full-year 2021 analyst consensus calls for $2.65 billion in revenues for a 56.25% annual advance.

Next year's revenue consensus appears to envision a slow-down in growth with a topline of $3.54 billion representing only +34%. But the profit levers getting cranked up is what makes PINS a strong Zacks Rank candidate right now.

For 2021, the EPS consensus launched 36% from 80-cents to $1.09. Obviously, 12-cents of that was the Q2 beat, but still analysts are seeing the profit potential of this unique social media maven as next year's EPS projection picked up a 28% boost from $1.13 to $1.45.  

What's Poking Pinterest?

The big headline to go with all those numbers above is that Pinterest lost active users in the quarter, which is kind of the opposite of what investors look for in these social media platforms.

Pinterest posted 454 million monthly active users (MAUs), down more than 5% from the 478 million the company reported in April. Management further noted that, as of July 27, its US MAUs have declined by approximately 7%, while global MAUs have grown approximately 5% year-over-year.

The company even explained matter-of-factly that economic re-openings were causing people to dial-down how much they used the platform: “Since mid-March, however, we believe engagement on Pinterest was disproportionately lower as people began spending more time socializing with friends outside their homes, eating in restaurants, and generally participating in activities that are not our core use cases,” the company said in a letter to shareholders.

And they knew this would happen as the pandemic "disproportionately" drove people to the platform in 2020 when they were trapped at home and couldn't do normal life. That's why Pinterest boards for home remodeling, redecorating, cooking, education, fitness and indoor hobbies and crafts saw soaring interest.

For more answers about why the stock dropped, I turned to Zacks Value Strategist, Tracey Ryniec, who bought shares of PINS in May 2020, for under $20. The Value Investor portfolio currently holds a 185% gain in PINS (at $56.70) and she's not planning on selling. In fact, she's getting ready to buy more.

Below I share some of her earnings commentary to Value Investor members. First, here's a quick quote she gave me yesterday...

"Pinterest tried to warn the prior quarter that things could get rocky on the reopen but no one listened. The underlying business is doing exactly what it should be though. The key is that they are raising the average revenue for international while they’re entering into new markets and with new products. And the video PINs are a big deal."

Pinterest Sell-Off

Here were Tracey's July 30 notes to subscribers...

I listened to this conference call like I did last quarter. The company warned last quarter that it was an investment year and didn't give Q2 guidance because it wasn't sure what was going to happen on the reopen with its business, which was a big pandemic winner.

And sure enough, many who turned to the site while under lockdown, had no need to on the reopen.

What freaked out the Street the most, was a loss of 7 million monthly active users (MAUs) in the highly lucrative US market. It fell from 98 million to 91 million.

International fell as well, but it's a bigger audience at over 300 million and they don't make as much money (yet) off of this market.

However, many who dropped off were those who were on desktops. They actually saw a gain in MAUs on mobile and among GenZ. Many called this the company's "spin" on the bad news. And so it was. But their gains with the GenZ crowd are real and they are the future.

Our Strategy: $57 was the May low when shares last sold off. It hasn't closed below that level, yet, but it's close at $58. In a bigger stock market sell off, these shares will sell off as well. If that happens, we'll have to see how bad it gets. I'd like to hold onto it in the portfolio because the future is bright.

It launched shopping in Australia, Canada, Germany and France, four lucrative markets, last quarter. It also launched the site in Mexico and Brazil. It's too soon to see the results of both, but management said they were pleased with initial results so far.

The market is big. And the company continues to grow its revenue per user. International used to be pathetic. Last year, Q2 was just $0.14 per user. But it's now $0.36. That's still low compared to the US, which was $5.03 this quarter, up 103% year-over-year.

Their strategy is working which is why revenue beat consensus this quarter.

Basically, I consider this stock to be on sale again. But it could go cheaper. I own it in my own personal portfolio. I'm waiting on the sidelines to see what happens now that it's back in the $50s. I will be deploying on further weakness under $57.

(end of excerpt from Tracey Ryniec's commentary to Value Investor members)

Tracey also told me more about their growing partnership with Shopify last year to offer instant shopping directly on the Pinterest site, further building the platform's stickiness and drawing bigger advertising customers to spend more.

She says management is conservative and has always been about slow, quality growth. "The platform is different. It's about inspiration and it's highly addictive. It started as recipes for Midwest women 10 years ago and now it’s GenZ users who are planning and dreaming on there through their PIN boards. And now that I can shop directly on there after I find something I like? That is huge. Especially for companies like Home Depot and Lowe’s. Or Wayfair."

I like the growth story here that Tracey describes, both domestic and international, and the valuation at just over 10 times sales vs lots of high-flying software and e-commerce (20X sales) is attractive. And I would only compare PINS to Facebook in the sense that the upstart has so much room to grow and ascend to the double-digit revenue per user of the giant.

I've been looking for a chance to get aboard the PINS train and I think this drop to support in the $54-56 area is very tempting for new positions.