Should Investors Buy Pinterest Stock on Weakness?

The valuation of PINS stock remains steep

The performances of the IPOs of consumer-facing internet stocks have certainly been mixed, as shown by the disappointing debuts of Uber Technologies (NYSE:UBER) and LYFT (NASDAQ:LYFT).

pinterest stock
Source: Shutterstock

The IPOs of enterprise-cloud names have been the big winners. A notable example is Zoom Video Communications (NASDAQ:ZM), which is up a sizzling 145%. In fact, on Friday there was another hot cloud IPO, Fastly (NYSE:FSLY), which soared 50%.

Yet there has been one consumer internet IPO that has bucked the bearish trend:  Pinterest (NYSE:PINS) IPO. But unfortunately, even this company – which operates an online scrapbooking platform — ran into some headwinds on Friday. Following its first quarterly report as a public company, Pinterest stock plunged 13% to $26.70. But PINS stock is still up about 22% since Pinterest IPO in mid-May.

Now the earnings report was fairly solid (actually, it was not too much of a surprise since PINS’  registration form provided color on the quarter).

So let’s take a look at the quarter. Its sales jumped by 54% to $201.9 million, compared to analysts’ consensus of $200.7 million. The company provided full-year, top-line guidance of $1.055 billion to $1.080 billion. Analysts, on the other hand, were looking for $1.07 billion.

But the real issue – for Pinterest stock – was the bottom line. Consider that its net loss was $40 million. While that was a $7 million improvement over last year’s results, the loss was a surprise for the owners of Pinterest stock. The adjusted loss was 32 cents per share of PINS stock,  but analysts’ average forecast was a profit of 11 cents per share.

When companies are growing quickly, their expenses can pile up.  Besides, as Pinterest CEO Ben Silbermann said in an interview with CNBC’s Jim Cramer, the company is focused on its “long-term” outlook.”

And he has a point. The potential of PINS stock hinges on drivers that will take some time to get traction, such as:

  • International Growth: About 70% of the website’s users are from outside the U.S. But its foreign revenues are still minimal, coming to only 7% of its total. And that was up from 5% in the same quarter of 2018. In other words, its overseas revenue can increase significantly. But penetrating foreign markets is far from easy. On the company’s earnings call, Silbermann noted that its foreign revenue likely will not materially improve until some time next year.
  • Engagement: Silbermann also indicated that users generally go to Pinterest for a particular purpose and then will usually not come back. As a result, he is looking to invest in new features in an effort to boost engagement. But again, that will take time and could prove quite difficult. Just look at the struggles Twitter (NYSE:TWTR) has had with engagement.

The Bottom Line on Pinterest Stock

There are certainly long-term catalysts that should drive Pinterest’s growth and help it reach profitability, boosting PINS stock in the process. It also helps that the company’s user base jumped 22% last quarter to 291 million.

The problem is that Pinterest stock already reflects much of the good news and then some. Keep in mind that PINS stock is trading at 17.5 times the company’s sales. By comparison, Facebook (NASDAQ:FB) and TWTR trade at roughly nine times their sales.

So Pinterest stock could drop further, especially as more shares of PINS stock come on the market when the lock-up expiration occurs in a few months. It will probably take some time for several catalysts to meaningfully boost PINS stock.

Tom Taulli is the author of High-Profit IPO StrategiesAll About Commodities and All About Short SellingFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

©2019 InvestorPlace Media, LLC