Despite the recent weakness in tech stocks, shares of Pinterest (NYSE:PINS), a visual discovery engine, are still up over 85% year-to-date. In fact, $1,000 invested in PINS stock during its March lows would now be worth around $3,400.
“Visual search and recommendations, collectively referred to as visual discovery … is a growing research area driven by the explosive growth of online photos and videos,” is how several academics described the activity in a 2017 paper.
We are fast approaching the final stretch of 2020. Now, many investors wonder if the shares will be able to continue their impressive run-up through the rest of the year, too. The stock is likely to come under further profit-taking pressure in the coming weeks. Yet long-term investors may consider buying the dips, especially around $32.50 or below.
Sales Results Belie PINS as Growth Stock
In late July, San Francisco, California-based Pinterest released second-quarter results. The company generates sales via advertising. Amid the economic downturn, revenue grew 4% YoY to $272 million. Because Pinterest is a growth stock, this tepid raised eyebrows, particularly after 2019’s growth rate was well over 50%. Also, Q2 growth of 4% was thanks to the growth in international markets where revenue rose by 72%. On the other hand, revenue stateside fell 2%.
Global Monthly Active Users (MAUs) grew 39% YoY to 416 million. A substantial number of new users are coming from outside the U.S. This growth pleased investors as advertisers eventually follow users, leading to increased revenues. Finally, the GAAP net loss was $101 million or 27 cents per share.
CFO Todd Morgenfeld said, “This quarter we reached a milestone — more than 400 million people now come to Pinterest every month to get and stay inspired … By all accounts, this was a challenging quarter as COVID-19 continued to spread … It has been encouraging to see the recovery in our business over the past few months, but there is still a tremendous amount of uncertainty and work to be done.”
Regular InvestorPlace readers will remember that Pinterest has also been integrating videos into the platform. This will increase their engagement levels. Earlier in May, it also partnered with Shopify (NYSE:SHOP).
The company did not provide guidance for revenue or adjusted EBITDA for full year 2020. Since the release of Q2 results, PINS stock is up about 40%.
Where PINS Stock Price is Now
PINS stock’s 52-week range has been $10.10-$39.64. In fact it hit an all-time high on Sept. 2. Importantly, shares have more than tripled off their mid-March lows. Therefore, some short-term profit-taking was to be expected. As a result, the stock now hovers above $34.
And this down move is consistent with the short-term technical picture of PINS stock. In the coming days, a move toward the $32.50-level or even below is possible. Such a level would offer a good entry point.
The current valuation levels of the shares also suggest that investors may decide to take some money off the table. Multiple-wise, its forward P/E is 208.63x, P/S is 16.49x and P/B is 11.18x. Those are all high numbers, even for a growth stock like Pinterest. If the U.S. economy stalls further than expected in the coming weeks, it may lead to decreased advertising revenue, driving PINS stock down further.
Do you already own Pinterest shares? Then you might want to stay the course and hold onto your position. That said, if you are worried about further profit-taking, then within the parameters of your portfolio allocation and risk/return profile, you may consider placing a stop loss at about 3%-5% below the current price point to protect the profits you’ve already made from the stock.
If you are an experienced investor in the options market, you may also consider using a covered call strategy with approximately a one-month time horizon, like an Oct. 16 expiry. Such a covered call position would offer you some downside protection. You would also be able to participate in a potential up move.
The Bottom Line in Time of Pandemic
The pandemic has brought millions of new accounts to Pinterest. The number of active users per month stands at over 400 million — an enviable number. These users will may turn Pinterest into an e-commerce company, too.
And in the long-run, the growth in MAUs is likely to continue, creating a substantial upside potential for PINS stock. As a result, its revenue and cash flow will possibly expand in the coming quarters. Therefore, I believe the shares belong in long-term portfolios.
However, there will likely be choppiness and some profit-taking in the short run, which should provide for better entry points.
On the date of publication, Tezcan Gecgil did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
The author has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. She also publishes educational articles on long-term investing.
