Pinterest's Margins and Momentum: Can AI and International Growth Unlock Undervalued Potential?

Pinterest's Q1 2025 earnings unveiled a compelling narrative: a platform leveraging AI-driven innovation to fuel margin expansion while riding a wave of global user growth. With monthly active users (MAUs) hitting 570 million—a 10% year-over-year surge—and adjusted EBITDA margins climbing to 20%, the company appears positioned to defy skeptics who've long dismissed its ability to scale profitability. Yet, its stock (PINS) trades at just 18.8x forward EV/EBITDA, suggesting the market hasn't fully priced in its potential. Let's dissect whether this undervaluation is justified—or a missed opportunity.

The AI Catalyst: Precision in Monetization

At the heart of Pinterest's transformation is its proprietary multimodal AI model, which now powers 30% more relevant visual search and recommendations than off-the-shelf tools. This isn't just about user engagement—it's about turning those interactions into revenue. The Performance+ ad suite, enhanced by AI, now drives 80% of campaigns outperforming traditional ads, with advertisers in retail and tech sectors boosting spend to capitalize on Pinterest's role in “decision-making moments.”

The data is clear: AI isn't a cost center—it's a revenue lever. Take shoppable pins and Lens, which now contribute to 49% revenue growth in the Rest of World (RoW). These features, still underpenetrated globally, could unlock higher average revenue per user (ARPU) in emerging markets where MAUs are soaring (RoW grew 14% year-over-year, versus just 4% in the U.S.).

Margin Momentum: The Numbers Tell a Story

Pinterest's Q1 EBITDA margin of 20%—up from 17% a year earlier—reflects disciplined cost management. But this is just the beginning. While CFO Julia Donnelly acknowledges near-term margin pressures from R&D and marketing investments, the long-term path is promising.

Consider the leverage in its cost structure: 25% of code is now AI-generated, cutting engineering costs while accelerating product development. Meanwhile, the company's focus on high-ARPU markets—like Europe (ARPU up 17%) and RoW (ARPU up 29%)—suggests monetization is catching up to user growth. If Pinterest can replicate U.S. ad efficiency (ARPU of $6.54) in these regions, the upside is staggering.

Addressing the Skeptics: Growth vs. Value

Critics argue that user growth is slowing in mature markets like the U.S., but they overlook two critical points:
1. International dominance: RoW now accounts for 56% of MAUs, and its ARPU is still a fraction of developed markets.
2. Commerce's untapped potential: Only 23% of global revenue comes from shopping ads today. Scaling Performance+ globally, particularly in Europe, could lift margins further.

Analysts at Morgan Stanley recently upgraded Pinterest to “Overweight,” citing its AI-driven flywheel—better recommendations → more user time → higher ad CPMs → advertiser ROI. This virtuous cycle is already evident: Q1's operating cash flow hit $364 million, a 2% jump year-over-year, while free cash flow rose 4% to $356 million.

The Investment Case: Buy the Dip, or Wait?

Pinterest's stock has underperformed peers like Meta (META) and Alphabet (GOOGL) in 2025, despite its margin gains. The disconnect? Investors may be waiting for clearer signs of sustained EBITDA expansion beyond 20% and global commerce adoption.

But here's why now could be a turning point:
- Valuation: At 18.8x EV/EBITDA, it's cheaper than its historical average of 25x, despite stronger margins.
- Catalysts: Second-half 2025 should see Performance+ rollouts in new markets, alongside Lens AR integration, which could supercharge engagement and ad sales.
- Balance sheet: $4.2 billion in cash provides a buffer for R&D without diluting shareholders.

Risks remain: macroeconomic headwinds could crimp ad spend, and AI's ROI is still unproven in some regions. Historical performance also highlights the risks: a backtest of buying Pinterest on earnings announcement days and holding for 20 days since 2020 showed an average return of -42.65%, with a maximum drawdown of -64.20%. This underscores the volatility of short-term earnings-driven trades.

But for patient investors, Pinterest's flywheel of AI + commerce + global scale makes it a rare growth stock trading at a value price.

Final Take: A Revaluation Is Overdue

Pinterest's Q1 results weren't just about growth—they were a proof point that its AI-first strategy can deliver both top-line acceleration and margin upside. With $960–$980 million in Q2 revenue guidance (beating estimates by 2–5%), and EBITDA margins likely to stabilize above 20%, the stock is primed for a rerating. For investors seeking a leveraged play on AI-driven ad innovation and underpenetrated markets, Pinterest offers a compelling risk/reward. The question isn't whether it can grow—the question is why it isn't priced to reflect it already.

Investment thesis: Buy Pinterest as a long-term hold, with a target price of $45–$50 (based on 22–25x EV/EBITDA multiple expansion). Avoid chasing near-term volatility but capitalize on dips below $35.