Pinterest Looks Overvalued, But That Might Not Prevent It From Rising

Pinterest (NYSE: PINS) is the quintessential momentum stock. For example, PINS stock is up almost 133% year-to-date and over 69% in the past year. Moreover, the stock’s valuation is extreme. In other words, everyone thinks PINS stock will rise because it is rising.

Nevertheless, this may not be the end of the momentum phase for the stock, although there are good indications it may level off.

Forward Earnings Momentum

Here is an example of what I am referring to. Seeking Alpha’s poll of 19 analysts’ forecasts for Pinterest earnings is at a price-earnings (P/E) ratio of 1,014x earnings for 2020. With the stock now at $44, the 2020 estimate of 4 cents per share puts it at this high P/E ratio.

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But the point is that these same analysts expect earnings of 22 cents per share in 2021. That is a growth factor of over 4x 2020 earnings.

That puts it at 202x earnings. In other words, analysts are looking forward to huge growth going forward. But it may be a huge stretch to expect earnings growth after 2021.

One reason is that people are not likely to be restricted at home logging on to Pinterest.com after 2021. The vaccine for Covid-19 will likely put sedentary activities to bed as people get out of lockdown syndrome behaviors.

What I am saying is don’t expect a 4x growth in earnings in 2022. That means the stock will lose its earnings momentum.

This also means that analysts’ price targets will start to slow down.

What Analysts Say About Pinterest

TipRanks.com reports that 21 analysts that offer a 12-month price target in the past three months have an average target of just $38.73. That represents a loss of 12% in PINS stock.

This is indicative of the stock’s expensive valuation since sell-side analysts rarely have lower price targets on stocks they cover.

Similarly, Marketbeat.com has a similar report. It says that 27 analysts have issued a report on the stock in the last 12 months with an average price target of just $33.52. That implies a drop in the stock of almost 24% from today.

But can you blame these analysts? No one is going to recommend at stock at over 200x earnings. And even if they do, they will have to admit it is a speculative play.

What is driving this growth? Well, for one, Pinterest had a 39% increase year-over-year in monthly active users (MAU) during Q2. This was after a 26% increase in each of the prior two quarters.

And as a result, my users eventually led to higher ad revenues. For example, analysts polled by Yahoo! Finance estimate that 2020 revenue will rise 31.8% from $1.1 billion to $1.45 billion in 2020.

Moreover, these analysts forecast 2021 revenue of $1.95 billion or again in 2021 of 34.5%. But can this kind of growth really continue?

What To Do With PINS Stock

Recently an analyst in Seeking Alpha pointed out that he believes the PINs stock momentum rally won’t last. He argued that although the stock could rally to $60 per share, it would have an “insane” price-sales ratio.

And that is the crux of the matter. Momentum stocks eventually peter out when the underlying fundamentals can no longer support the huge stock growth on an ongoing basis.

Two things tend to happen. First, the stock may fall with the first set of disappointing earnings. Or else the stock treads water until its earnings growth catches up to the super-high valuation.

I suspect that what may happen with PINS stock is a mixture of both. There may still be some momentum left in the stock with next year showing a huge increase in revenue. But eventually, probably by the end of this year, or the first quarter of 2021 analysts will realize that 2022 growth will no longer be at the same pace.

At that point, the stock could take a hit. I would wait to buy PINS stock until there is a better sense of a margin of safety.

On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Mark Hake runs the Total Yield Value Guide which you can review here.

Pinterest Looks Overvalued, But That Might Not Prevent It From Rising