During the onslaught of the novel coronavirus, shares of social media platform Pinterest (NYSE:PINS) were trading hands in the low teens. In hindsight, that was the best opportunity to wager on PINS stock because by mid-February of this year, the shares were mounting what was then a credible challenge to triple-digit prices.
Naturally, the belief that this circumstance could once again hold true has kept bullish investors inspired. True, PINS stock is down over 20% on a year-to-date basis up to the Sept. 10 close. And since closing at $89.15 on Feb. 16, shares are down over 39%. Yet on a technical level, PINS could be shaking out the weak hands for a move higher.
Indeed, our own Louis Navellier has been incredibly bullish on PINS stock, forging one argument in favor of the underlying company and submitting another optimistic thesis a day later. Considering that Navellier is someone who found Apple (NASDAQ:AAPL) at $1.49 and Amazon (NASDAQ:AMZN) at $46, when he speaks, people listen.
I’ll let you read the details of his arguments but in short, Navellier believes that the extreme pessimism toward Pinterest’s less-than-convincing second quarter of 2021 earnings report is unjustified. It’s not that the Q2 numbers were underwhelming but rather the guidance for Q3 was a no-show. Management stated that it couldn’t provide a forecast for monthly active users due to “lack of visibility into certain key drivers of engagement.”
Usually, investors read between the lines when a company fails to provide guidance and that’s what happened with PINS stock. However, Navellier retorted that, “Pinterest, however, has evidently chosen to be honest and admit that it isn’t prepared to provide MAU guidance right now. But that’s not a bad thing at all. Rather, it leaves the door open to a positive surprise in the upcoming quarter.”
So, is it time to trust Pinterest?
MAU Fallout Is a Problem for PINS Stock
When assessing the Q2 results from a year-over-year framework, it’s difficult not to get excited about PINS stock. For one thing, on a combined domestic-and-international basis, MAUs increased by nearly 9% to 454 million. That can’t be called a failure.
“Moreover, while MAUs are the lifeblood of a social media platform, revenue generation is also important. In that area, Pinterest excelled. For Q2 2021, the company grew global revenues by an astounding 125% year-on-year to $613 million,” stated my InvestorPlace colleague.
Moving forward, Pinterest is using the free organic marketing opportunity — the hostage audience catalyst, if you will — of the pandemic to bolster the platform from a place to browse to a vibrant community of people sharing their passions and expertise. It all sounds great for PINS stock but the broader data is worrisome.
While MAUs were up on a YoY basis, domestic growth was a laggard, down 5.2%. Worse yet, this was the first time since at least Q1 2016 where growth in either the domestic or international segment fell into negative territory. Between Q1 2017 through Q1 2021, domestic MAU growth averaged 9.2%.
On the international front, MAUs for Q2 2021 saw 13% growth YoY. However, this was a terrible performance compared to the prior 17 quarters, which averaged 44%. So I think those who are bullish on PINS stock are focusing a bit too much on the YoY comparison and not on the bigger picture.
If they did the latter exercise, they might appreciate why the bears are so concerned. It certainly looks like this might be an inflection point — one that potentially moves in the negative direction in Q3 and beyond.
Profitability Becomes Next Issue
Now, Navellier is absolutely correct in noting the dramatic revenue growth in Q2. However, the challenge for prospective buyers of PINS stock is that the market doesn’t move on past information. Meaning that if we do indeed encounter a negative inflection point in MAUs, investors might not be able to depend on such impressive sales growth metrics in future quarters.
And if Pinterest can’t deliver the goods on the top line, then it seems the bottom line is guaranteed to suffer. Yes, the sales haul of $613 million is awesome but it only resulted in a net income of $69 million. If the fading of the pandemic is pressuring MAUs, then Pinterest won’t be able to reasonably depend on a repeat revenue performance.
Eventually, that would crimp profitability potential, which is why so many have abandoned ship on PINS stock.
That’s not to say that shares can’t bounce higher. Personally, I’m leery of shorting PINS stock because the equity unit’s performance this year could represent a consolidation pattern that eventually results in an upward swing. Crazier things have happened.
Still, gambling on this technical thesis is a huge risk ahead of the company’s Q3 report, expected on Oct. 27. Conservative investors should probably sit this one out until more data comes in.
On the date of publication, Josh Enomoto 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.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.