Pinterest Stock May Back off, but It Has Plenty More Upside

Investors cannot get enough social networking companies. Pinterest (NYSE:PINS) is no exception. PINS stock is enjoying an uptrend that has little chance of losing momentum.

Source: Nopparat Khokthong / Shutterstock.com

In its Q2 earnings report the company shared unimportant developments that led to PINS stock heading higher. The only near-term risk is that investors paid too much for the stock.

Pinterest will probably report its next quarterly earnings report at the end of next month or later. Why should investors continue holding shares?

On Aug. 28, Pinterest announced that it terminated its office space that would have been constructed at its headquarters campus in San Francisco. This will save it money in the long-term as it pivots its operations toward supporting more staff who work from home.

“A more distributed workforce will give us the opportunity to hire people from a wider range of backgrounds and experiences,” said Chief Financial Officer Todd Morgenfeld.

A Closer Look at PINS Stock

On the income sheet, Pinterest will take an $89.5 million charge in the third quarter. In doing so, it will save on lease payments that would have cost it $440 million. Near-term risks from breaking the deal include a lawsuit from the landlord. Conversely, the company may settle out of court and still lower its operating costs.

Management likely figured that its staff may work from home by using tools to get work done. For example, staff may use Zoom Video Communications (NASDAQ:ZM) to conduct meetings.

It may use Dropbox (NASDAQ:DBX) or Microsoft (NASDAQ:MSFT) for file-sharing or project collaboration, respectively.

Investors will need to weigh Wall Street’s concerns on Pinterest’s prospects, 10 of the 21 analysts rate the stock as a buy. The average price target is $37.38 (per Tipranks). Conversely, Simply Wall.St highlighted the company’s financial health and strong future growth prospects.

Pinterest has plenty of short-term assets that exceed its liabilities. The company is debt-free, so it has no interest in debt costs to worry about.

In the second quarter, investors piled on the stock when it reported global monthly active users topped 416 million. Revenue grew $272 million, up 4% from last year. The company lost $101 million on a GAAP basis and lost $34 million on an adjusted EBITDA measure.

“In these tough times, we’re seeing more and more people rely on Pinterest to cook at home, plan kids activities, and set up a home office,” said Ben Silbermann, Pinterest’s CEO and co-founder.

Trading at yearly highs and unfavorable valuations, investors are betting that this trend continues. And if the company adds more users, Pinterest will have a powerful audience base. Advertisers will reallocate their budget, spending on Pinterest’s platform instead of on Twitter (NASDAQ:TWTR) or Facebook (NASDAQ:FB).

Outlook

Pinterest's seasonaliy compared to the S&P 500

Source: https://www.stockrover.com/

Pinterest forecast revenue for the month of July will grow by an impressive 50%. For Q3, it expects revenue will grow in the mid-30% range Y/Y. The company lost money last quarter and will need to re-evaluate its operating costs.

But given the increasing revenue, it does not need to lower expenses yet just to satisfy investors. Increasing research and development efforts will strengthen the platform and attract even more users.

In the seasonal performance chart shown right, Pinterest stock should have fallen in September. It should fall more next month, if the seasonal pattern repeats itself.

Cautious investors unwilling to chase Pinterest shares at these valuations should wait for shares to pull-back to the 50-day moving average, at around $37.00. Although it is unlikely, the 200-day moving average at $25.00 is the next level of support to watch out for.

Despite the downside technical risks, Pinterest has a good chance of beating its forecast. If it does, it will rise again. Besides, the stock trades at a market cap of $26 billion, below that of Twitter. With its impressive user growth, it could be worth more than Twitter.

Disclosure: On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.

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