Shares of Pinterest, the popular image sharing and social media company, jumped 13% on Oct. 20 after it was reported that fintech giant PayPal was in talks to acquire it. While no formal takeover had been announced, the rumor alone was enough to give PINS stock a much-needed lift. After soaring in 2020 during the pandemic, Pinterest’s share price had fallen about 20% before the rumor’s spread. Even after the 13% increase on the PayPal rumor, Pinterest shares were still down 5% on the year by close on Oct. 20.
But then, on Oct. 25, PayPal broke its silence and addressed the rumors, saying that it is not in talks with Pinterest and has no plans to purchase the social media company. That announcement was like a bucket of cold water in the face of PINS shareholders. The social media company’s share price promptly reversed and fell 18%, dropping back down to $50. With a potential acquisition now off the table, investors are rightly wondering where Pinterest goes from here?
Beyond the rumored $45 billion acquisition by PayPal, San Francisco-based Pinterest, which attracted a lot of new members during Covid-19 lockdowns and generates money from digital advertising, is increasingly moving into online purchases. Pinterest recently announced new features that enable sellers to upload product images and catalogues and make them available to online audiences.
The expansion into online shopping maybe what ultimately makes Pinterest attractive to digital payments company such as PayPal. According to Pinterest, online shoppers are increasingly buying items they see on social media websites, especially when products are recommended by so called “influencers.” Buying Pinterest would an online payments company to capture a greater share of the e-commerce space and diversify its income through sales of online advertisements.
And online payments and fintech companies have been scooping up social media companies lately. The rumors that PayPal was interested in Pinterest came after the fintech giant purchased online coupon finder Honey Science in 2019 for $4 billion, and bought Japanese buy-now-pay-later firm Paidy for $2.7 billion earlier this year. Analysts say they expect to see a wave of social media and fintech tie-ups within the e-commerce space over the next few years.
Beyond a Buyout
Looking beyond an eventual buyout, there are reasons for investors to be cautious with PINS stock. Pinterest co-founder Evan Sharp recently announced that he is stepping down as chief creative officer to join LoveFrom. That’s a new design firm led by Jony Ive, the designer of many of Apple’s (NASDAQ:AAPL) most iconic consumer electronic products. It was Evan Sharp who started Pinterest as an “online scrapbook” and photo-sharing platform in 2010 along with Ben Silbermann, who remains the company’s CEO. The loss of Evan Sharp puts Pinterest at a bit of a crossroads, according to analysts who cover the company.
Also at issue is the slowing growth that Pinterest is experiencing coming out of the pandemic. Much of the reason for the drop in PINS stock this year has been repeated warnings from the company that its number of users is cooling off as people emerge from Covid-19 hibernation and look for distractions outside their home. In its most recent quarterly earnings report, Pinterest announced that it had lost 24 million monthly active users due to the economic reopening, news that sent the share price sharply lower.
Pinterest also has a sky-high price-to-earnings ratio of 165.33, which has led some on Wall Street to label the stock as being “overvalued.” By comparison, the average price-to-earnings ratio among companies listed on the tech-heavy Nasdaq stock exchange is 30.
Hold on PINS Stock
While a potential buyout from PayPal was intriguing, a rumor is never a good reason to buy a stock. That’s evidenced by the fact that the PayPal acquisition failed to materialize. Looking beyond such rumors, Pinterest is a social media company that is experiencing slowing growth, a senior leadership transition, and has a valuation that is extremely high relative to its peers. All this means that Pinterest stock does not make for a great investment right now.
People who currently own Pinterest shares should hold onto them until such time as they rebound and increase in value. Investors who don’t currently own Pinterest stock should hold off. Wait until the company gets back on a track or a real deal materializes. Right now, PINS stock is not a buy.
On the date of publication, Joel Baglole did not hold a position in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.