While equity markets are breaking new records, there are a few quality stocks that have fallen out of favor. Pinterest (NYSE:PINS) is one of them. As such, today we will make the bullish argument for PINS stock.
Even though the S&P 500 broke its all-time highs, PINS stock is now 48% off its own record. Luckily, this comes from a really extreme level, so the stock is still making its loyal fans money. Moreover, this price action is eerily similar to its first eight months public. In the summer of 2019, Pinterest fell precipitously before investors snapped it up. That bounce extended some 60% before the pandemic knocked it down again.
We all know what happened next. The whole cohort went ballistic and PINS stock rallied almost 800% before topping out. The exuberance in social media stocks exploded in a fantastic panic-buy situation. When everyone was out of work, going online was the only thing to do. The logic had some merit — but buyers took it to an extreme.
True, Pinterest is a platform where folks could explore at-home interests other than work. Still, investors were piling into anything that was an online business, so the enthusiasm reached unrealistic levels. This came to a peak in February, when PINS stock made its high watermark. The stock is far from that now, but it has fallen back into pivotal levels. The technical thesis? This is where it should find support.
The Bears Had Their Way
So far, the bears have been in charge here and have drawn a very wide descending channel. Currently, Pinterest is at the lower end of that range. Also, this coincides with level support from this time last year. Since the business is intact, then it would make sense to expect a relief rally soon. I don’t expect miracles, but the buyers should be near to at least form a base.
Further, this last point about Pinterest having a quality business is very important. Why? Because not all falling knives are worth catching. In this case, the financial statements from Pinterest suggest it is still progressing well. In fact, total revenues are around three times that of 2018. Moreover, they swung into a rolling 12-month profitability. Statistically speaking, PINS stock has a 12 times price-sales (P/S) ratio. This is not outrageously expensive. What’s more, I would give PINS a pass on the price-earnings (P/E) ratio. Delivering growth doesn’t come cheap, as management has to spend a lot in the process.
The opportunity in this stock remains the same as it was last year. Sure, the exuberance has changed. But in this case, that’s a good thing. To say it in Wall Street terms, this drop shook a lot of weak hands off. So, buyers of Pinterest now will have better conviction for the foreseeable future. They’ll be less quick to hit the sell button.
PINS Stock Is Still in Good Hands
Management just reported earnings, so that headline is out of the way. Rather, the next hurdle here is to face the level around $52 per share, which was the ledge from last month. Prior support becomes forward resistance, so it won’t be easy breaking through it. There is also a giant gap to $58 that could entice a few chasers.
Going forward, I expect that the short-term price action will require heavy lifting. But in the long term, this stock should stabilize and revert to trading higher with the market. There is a possible bearish pattern in play now and it could have another $3 to go. Therefore — and regardless of how good the opportunity seems — investors should temper their enthusiasm.
We should also not assume that this is the low for the next six months. Consequently, investors should only take partial positions leaving room to manage the risk. Remember: stocks have to rally within the collective of the market. We are at extreme levels there, too, so there could be hiccups from that.
The recent turmoil in the Pinterest stock price had a lot to do with the PayPal (NASDAQ:PYPL) headline. Recently, a rumor broke out that the two companies were in talks for a buyout. This caused a huge PINS spike that disrupted the normal price action. Unfortunately though, within a couple of days, that rumor died and the letdown went too far the other way.
Somewhere in the middle will eventually lie the truth. And in the long term — buyout or not — owning PINS stock makes sense for a viable bullish thesis.
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.
