This year has not been so friendly to Pinterest (NYSE:PINS) stock. The year-to-date stat is pretty disappointing at -18%. This is especially harsh when you consider that the indices are up just as much the other way.
However, it’s hard to feel bad about it overall. Because if you consider a slightly longer time horizon, PINS stock is up 33% and in line with the S&P 500. Investors who stuck with it from the IPO are up more than 100%.
This speaks to the long-term opportunity it presents, and it is exciting.
The world is trending toward a digital presence. When social media behemoth Facebook (NASDAQ:FB) is pushing for a metaverse, you know it’s going to happen. The global shutdown of 2020 accelerated the digitization trend. The fact that people could not leave their homes for months made it a priority. The argument against using online resources has all but disappeared.
Technically, there is potential trouble on the charts below PINS stock.
Although it has fallen into a support zone, and losing it would create another bearish trade. That is not my assumption today, but it is worth noting it. As long as the stock market remains healthy, I find it to be an unlikely development.
PINS Stock Moves Fast
The risk stems from how fast the rally was at the end of last year. PINS stock broke out from $44 per share in a ferocious way. It had five extremely strong weeks in a row that brought about an equally stronger rally above that still. It has long given up all these gains and is hovering just above $50 per share. This doesn’t mean that its fundamental thesis is dead.
It is normal for stocks to revisit their breakout necklines for footing. This harsh 40% correction seems violent, but that’s because the rally up was even more so. If the stock markets in general crash, Pinterest could fall to $45 through no fault of its own. It would even be a better entry there.
Fundamentally, the company is firing on all cylinders. Don’t take my word for it, the data exist in the profit and loss statement. Management has more than quintupled its revenues in four years. More importantly, they swung into a positive net income situation. On an annual basis, Pinterest now has a positive cash flow from its own operations. This gives them freedom to execute on plans without needing to rely on debt.
Know What to Look For
Evaluating growth stocks is where most experts err. The price-to-earnings ratio is in triple digits, and that often scares investors seeking value. For a stock that grows this fast, the metric that matters more is the price-the-sales (P/S). PINS stock has a humble 16.7 P/S ratio, which is in line if not cheaper than its cohort.
At the very least it does not show any obvious bloat situations. Owners of the stock have realistic expectations, therefore it is hard to disappoint them especially after this correction.
The bears will need to work harder to bring it down from here than they did getting it to here. If the stock markets are higher in the future, my bet is that PINS is also doing well.
I have to admit that the negative reaction to its earnings report was surprising. Investors made a mistake, and they will end up buying it back maybe as soon as this year.
The first step in a turnaround comes from establishing a floor. As long as this week’s low holds, PINS stock has the opportunity to mount a come back rally. There will be many points of resistance, especially at $57 per share. Even more into the earnings gap. Sellers could be lurking along, but “the bottom” is a process not a sharp “V” shape. I am not a perma-bull, as I have cautioned against chasing it before.
Not Too Fast
Patience and conviction are the two main ingredients that fans need. Depending on the investor’s time frame, traders might want to stop out quickly and retry lower. Longer-term investors should start with partial positions, so they can manage the risk later. Overall conviction should be lower than normal.
We just learned that the Federal Reserve plans on ending to taper process by the middle of the next year. That’s a lot of tailwinds disappearing and we don’t know yet how it will affect Wall Street sentiment. They have been fickle of late, so I have to be open to being wrong.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Nicolas Chahine is the managing director of SellSpreads.com.
