Compared to other social media stocks, Pinterest (NYSE:PINS) stock is a bit of an oddball. I personally don’t have much use for the platform, but I can see the appeal … somewhat. After all, we could all use a daily dose of inspiration for shopping, relaxing, business and marketing purposes. Still, I’m not the only one who doesn’t quite “get it.”
But if you’re someone who is interested in investing in PINS stock, here’s a deeper look at what you need to know about the company — and stock — moving forward.
PINS Stock: A Very Strong Balance Sheet
A close look at the balance sheet for Pinterest shows that it has strong financial strength. In fact, according to GuruFocus the current cash-to-debt, debt-to-equity ratios are 17.62 and 0.05, respectively.
A strong balance sheet is a positive factor when considering whether a stock is investment-worthy. However, it is not the only thing to consider. When looking at the balance sheet, the phrase “cash is king” should ring in your ears. After all, plenty of cash is necessary to run a successful business. Thankfully for PINS, the company has performed well in this regard.
In 2019, it reported cash and short-term investments of $1.72 billion. That was an increase of 173.34% compared to 2018. In 2020, Pinterest experienced another moderate increase of 2.61% with a figure of $1.76 billion reported.
In general, the cash and cash equivalents growth for the period 2017-2020 is too high.
Revenue Growth: Consistent and Strong
Revenue is the start of everything in business, bringing cash and using cash, to make a profit. Pinterest excels in its revenue growth for 2017-2020. According to MarketWatch, in 2017, it reported revenue of $472.85 million. Then in 2018, 2019 and 2020, its revenue grew 59.87%, 51.17% and 48.12%, respectively. Pinterest reported 2020 revenue of $1.69 billion. This is a strong revenue trend that I admire.
But, while a strong balance sheet and strong revenue growth are the two factors to like about Pinterest, it isn’t without its blemishes. Here are the three main things that make PINS stock less appealing.
Lackluster User Growth
Pinterest benefited greatly from the coronavirus pandemic in 2020. The stock reached a 52-week high of $89.90 on strong momentum that started in late 2020. But the stock has since tumbled about 40% to its current price near $55.
The main issue? Repeated misses on its user growth targets. The news on lower-than-expected monthly users led to a downgrade by JPMorgan on Pinterest stock.
If lackluster or, worse, declining user growth continues in the next quarters this could put a significant dent in the long-term case for PINS stock. After all, it would lead to a decline in advertising revenue for Pinterest. Not so good.
Pinterest’s management must find a solution to this decline in users as more people start to enter the “new normal.” Otherwise, its success in 2020 will be short lived.
Profitability: Not Present Yet
Another risk factor to consider with Pinterest is that despite its strong revenue growth, the company is still losing money. We can see this trend in its net losses of $130.04 million, $62.97 million, $1.36 billion and $128.32 million for 2017, 2018, 2019 and 2020, respectively.
This ultimately points to an inefficient business model, as the company is struggling to deliver profits.
Valuation: Too Pricey
The final issue with PINS stock that I’d like to bring to your attention is it’s overprice valuation. If we use MSN Money to compare key financial metrics, such as price-to-sales ratio, price-to-book value and price-to-cash flow ratio, to same ratios of the Software & IT Services space more broadly, we find that Pinterest is relatively overvalued.
Specifically, PINS stock has a price-to-sales ratio of 21.23x, a price-to-book value ratio of 15.57x and a price-to-cash flow ratio of 3,145x. Meanwhile, the industry’s equivalent ratios are as follows: 7.35x, 7.76x and 29.68x, respectively.
Ultimately, PINS stock has some severe fundamental issues to solve before it’s truly buy-worthy in my book. Until revenue generates profit and its valuation is attractive, I suggest avoiding the stock.
On the date of publication, Stavros Georgiadis, CFA 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.