When a company is posting strong financials but the share price is expensive, investors have a tough decision to make. A case in point would be Pinterest (NYSE:PINS), which had an outstanding third quarter. The data is encouraging, but now PINS stock is relatively overbought.
As we’ll see from the price action of PINS, the sentiment surrounding Pinterest is overwhelmingly positive at the moment. Contrarians might bristle at the thought of buying a stock when the trading community is enthusiastic about it.
Valuations matter, so I won’t deny that prospective investors should consider the high price tag. Caution is generally advised after a stock spikes as a retracement is always a possibility.
On the other hand, it’s impossible to deny Pinterest’s solid stats. After further analysis, even staunch value investors might be willing to take a chance on PINS stock.
A Closer Look at PINS Stock
Just because Pinterest is a social media platform, this doesn’t mean that PINS stock wasn’t impacted by the novel coronavirus.
In fact, the share price tumbled from $25 to a 52-week low of $10.10 in February and March of this year.
However, as we’ve seen in a number of social-media stocks in 2020, the rebound in PINS has been incredible. Believe it or not, the PINS share price powered its way up to $35 in August and $60 in October.
To be more specific, PINS ended October at $58.95. But here’s the problem. The trailing 12-month earnings per share for PINS stock is -60 cents.
Having negative earnings per share during the past year isn’t a good sign for PINS stock. When we combine this with the swift run-up in the share price, the overall picture looks worrisome.
Therefore, it’s understandable if value-oriented investors choose to wait for PINS stock to cool off a bit before taking a long position. And for current shareholders, there’s nothing wrong with taking profits at this point.
Outstanding Results
So now, investors have to weigh the valuation concerns against what’s undeniably a fiscally sound company. As evidence of this, let’s take a look at Pinterest’s dazzling third-quarter results.
As reported by FactSet, Wall Street was preparing for quarterly adjusted earnings of four cents per share and $383.5 million in revenues. In hindsight, it’s fair to say that the analysts’ expectations were too modest.
Pinterest’s actual third-quarter results were adjusted earnings of 13 cents per share and revenues of $443 million. Impressively, those revenues represent a 58% improvement compared to the year-ago quarter.
All of this was reported on Oct. 29. On that day, PINS stock traders went bananas and bid the share price up to $62.46 for a 26.82% single-session gain.
Putting It in Perspective
If you don’t think that $60+ is expensive for PINS stock, let’s see if we can put this into perspective. Back in April of 2019, Pinterest held its initial public offering (IPO) and priced its common stock shares at $19.
Less than two years later, should PINS stock really be triple the IPO price? Some analysts seem to think so, apparently. For example, Baird analyst Colin Sebastian recently hiked his price target on PINS from $41 to $68.
Sebastian’s being modest compared to KeyBanc Capital’s Justin Patterson, who increased his PINS price target from $60 to $76. Even more ambitious is RBC Capital Markets analyst Mark Mahaney, who boosted his price target on PINS stock from $44 to $80.
As I see it, investors shouldn’t base their decisions on these lofty price objectives. With the market pushing PINS stock up to $60, the analysts practically had no choice except to rise their targets.
Your personal price objective should be based on whether you feel that PINS stock can stay on its current trajectory. It’s a tall order, and cautious investors might choose to stay on the sidelines.
The Bottom Line
Judging by the reaction of the trading and analyst communities, it’s reasonable to conclude that PINS stock will continue to propel upwards.
For cautious, risk-averse investors, however, it’s perfectly fine to wait for the PINS stock price to cool off. After all, the idea is to buy low and sell high, not the other way around.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.
