- As Pinterest (PINS) stock keeps dropping, you may think it’s entering value territory.
- However, it’s only a bargain if the company can avoid a big slowdown in revenue/earnings growth.
- With some metrics showing this won’t be the case, it’s best to follow the crowd, and err on the side of caution.
Now down to the low $20s per share, Pinterest (NYSE:PINS) may be starting to look like a value play. At current prices, PINS stock trades for just 20.8x estimated earnings for this year. With earnings growth forecasted for 2023 and 2024, you may think the market overreacted by sending shares in this visual discovery platform operator to such a low valuation.
But here’s the thing: It is only a bargain, if you assume it will deliver results in line with forecasts. For this to happen, the company needs to avoid a big slowdown in its revenue and earnings growth. On this surface, this doesn’t seem to be an issue. After all, it grew its revenue by 52% last year.
However, taking a closer look at certain metrics, it’s far from a lock whether this will be the case. It may be best to follow the crowd, and not fight the trend.
| Ticker | Company | Current Price |
| PINS | $20.24 |
PINS Stock Is Cheap for a Reason
From the time to time, the stock market calls it wrong. That is, market participants read too much into a situation, and let fear, uncertainty and doubt (FUD) get the better of them. But in the case of Pinterest stock, the current sentiment for it may be right on the mark.
With the continued drop in PINS stock, it has fallen to what some may consider to be a bargain price. You don’t see too many stocks trading at Pinterest’s current forward valuation, that estimates say will experience several subsequent years of above-average annual earnings growth (in the case of Pinterest, above 30%).
Per the Wall Street Journal, consensus calls for Pinterest’s earnings to go from around 97 cents per share this year, to $1.26 per share in 2023, then onto $1.62 per share in 2024. In theory, if it were to hit these earnings targets, and saw just a moderate amount of multiple expansion (say, from a 20x to a 30x earnings multiple), this stock could easily more than double in price during this timeframe.
Again though, this is far from a given. There’s evidence to suggest it’ll fail to hit these earnings targets.
Pay Attention to Its Key Metrics
It’s important to note that these aforementioned analyst earnings estimates for PINS stock have been walked back considerably. Just three months ago, Wall Street’s sell-side was calling for earnings of $1.32 per share this year, and $1.81 per share next year.
This walking-back has played a big role in Pinterest’s stock price decline year-to-date (44%), and its more than 67% price decline over the past six months. Why are analysts lowering their expectations for its operating performance? Pandemic tailwinds were material in the company’s strong results during 2020 and 2021. The “stay-at-home economy” meant heavy traffic on its platform of the same name.
The pandemic also provided the opportunity to maximize average revenue per user (ARPU) in the U.S. market. But take a look at the year-over-year change in its Monthly Active Users (MAUs). It could spell trouble ahead. Worldwide, Pinterest’s MAUs dropped 6%. Even worse, in the U.S. alone, MAUs dropped by double-digits (12%).
Through better monetization, the company more than made up for this. That’s clear from its high amount of revenue growth during 2021. However, increased monetization of its shrinking user base can only go so far. That’s especially true as it’s not just the MAU metric that’s trending lower.
The Takeaway
Along with the total number of monthly active users, something else is dropping with Pinterest. That would be the amount of time its users spend on the platform. As Morgan Stanley’s Brian Nowak argued, in his downgrade of the stock last month, this points to “too much uncertainty” with its future results. Less time spent on the site of course means more challenges with increasing monetization.
Currently earning an “F” in my Portfolio Grader, trends are not on its side right now. That’s the case when it comes to user trends. It’s also the case when it comes to the downward trend the stock has been on since last year.
Next week, when it reports earnings for the first quarter of 2022, we’ll have a clearer picture of where things are headed. Even so, until there’s evidence showing that the market has overreacted to signs of possible growth deceleration, it’s best to follow their lead and stay away from PINS stock.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
