While most sectors suffered severe losses in the year so far, few incurred as much damage as social media. With the digital advertising space encountering substantial headwinds, prominent leaders in the space fell sharply. Still, Pinterest (NYSE: PINS) managed to rise above the muck recently, thanks largely to a better-than-expected earnings report. While not a popular opinion, embattled stakeholders may want to consider selling PINS stock into strength.
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Before diving into the concerns for Pinterest, it’s important to acknowledge the outstanding performance it generated for the third quarter. According to TipRanks reporter Sheryl Sheth, the company posted adjusted earnings per share of $0.11, beating out the consensus target of $0.05 cents per share. Still, the latest figure did dip below the prior-year period’s adjusted EPS of $0.28.
On the top line, “revenue rose 8% year-over-year to $684.55 million and beat the consensus by $18.37 million.” Perhaps most significantly, global monthly active users stood at 445 million, an improvement over Q2’s haul of 433 million.
Per TipRanks reporter Shrilekha Pethe, Wall Street may have been reassured that Pinterest stabilized its user base. Amid subscriber losses in rival social media platforms, going in the opposite (and positive) direction certainly helps Pinterest’s case. Last Friday, PINS stock gained nearly 14% in equity value.
Of course, one solid earnings report usually doesn’t change the entire trajectory of an embattled organization. Since the beginning of this year, PINS stock has fallen nearly 36%, reflecting a significant uphill battle ahead. Also, it’s worth noting that Pinterest’s initial offering price was $19 a share. At the moment, early bird investors only gained about 31%, which is somewhat disappointing.
Considering that steep obstacles remain, it may be time to consider selling PINS stock into strength.
PINS Stock Faces Fundamental Challenges
While not taking anything away from the enormous rally of PINS stock, investors must recognize that moving forward, strong performances may be harder to come by. Essentially, the business faces fundamental challenges that should not be ignored.
For one thing, the improvement in MAU count represents a relative uptick. According to data compiled by Statista.com, Pinterest’s MAU tally peaked during Q1 2021, when it reached 478 million. Since then, MAUs have steadily dipped lower. A count of 445 million still symbolizes nearly a 7% loss from the peak.
To be fair, a case can be made that the bump-up in MAUs for Q3 could spark a turnaround. However, this optimistic thesis may be unlikely, and that’s because of purchasing power data.
Between Q1 2020 and Q1 2021, Pinterest’s MAUs increased from 367 million to 478 million (a 30% rise). During the same period, the purchasing power of the U.S. dollar declined by 1.8%.
However, from Q1 2021 to Q3 2022, Pinterest’s MAUs declined from 478 million to 445 million (the aforementioned 7% loss). In this period, purchasing power declined by a staggering 11%. That might be an unprecedented decline in purchasing power.
The reason why this juxtaposition is so significant is because Pinterest’s business aligns with future planned purchases of goods and experiences. However, such sentiments will erode quickly if the greenback’s purchasing power declines rapidly (i.e. higher inflation).
As a result of higher inflation, the central bank must act aggressively. Unfortunately, doing so will likely spark recession risks, which also pose problems for the consumer.
Therefore, the uptick in MAUs may only be temporary for PINS stock. Fundamentally, it’s wiser for stakeholders to consider selling into strength.
Is PINS a Good Stock to Buy?
Turning to Wall Street, PINS stock has a Hold consensus rating based on four Buys, 14 Holds, and zero Sells assigned in the past three months. The average PINS price target is $26.47, implying 13.56% upside potential.
Conclusion: Pinterest Stock Might be a Value Trap
Another reason why investors may want to be extremely careful with PINS stock centers on its underlying financial metrics. Essentially, the business may be a possible value trap.
On paper, the company brings some exciting stats to the table. Perhaps most prominently, its three-year revenue growth rate stands at 37.7%. In sharp contrast, the median level for the interactive media industry sits at 6.3%. On the bottom line, Pinterest features a net margin of 2.21%, ranked higher than 53.2% of sector rivals.
Therefore, these performance figures might convince some prospective investors to overlook its nose-bleed price-earnings ratio of almost 270 times trailing or 41 times forward. However, this could be a serious mistake.
Fundamentally, the compelling financial statistics undergirding PINS stock have been predicated on an inflationary cycle. However, the Fed has already signaled its intent to control inflation. Combined with other macroeconomic headwinds, such as geopolitical tensions and hawkish central banks around the world, Pinterest faces a questionable framework.
