Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...

Pinterest (PINS 0.65%) charged out of the gate last month, going public at $19 a share only to surge 28% on its first day of trading (and 42% from IPO day to today).

Speaking of today, three weeks after the IPO, the quiet period preventing Pinterest's underwriters from discussing the stock has finally expired -- and all of a sudden, the bankers can't shut up about it. Problem is...much of what Wall Street is saying about Pinterest is not what Pinterest shareholders want to hear.

Here's what you need to know.

Block letters spell IPO

Image source: Getty Images.

The bankers speak

According to its IPO prospectus, 12 separate bankers joined together to underwrite Pinterest's IPO last month. Ten of them spoke up today about Pinterest's prospects. Unfortunately, only two of these analysts like Pinterest at its current valuation of roughly $27 per share.

Let's begin with them.

Pinterest's biggest fans

Out of 75 million Pinterest shares sold at the IPO last month, roughly 62% -- 46.8 million shares -- were underwritten by just two bankers: Goldman Sachs and JPMorgan. However, neither of these two bankers are the ones telling investors to buy Pinterest stock today. Instead, out of the 10 new ratings filed on Pinterest this morning, TheFly.com lists only two bankers rating it buy or outperform.

Citigroup, which rates Pinterest stock a buy with a $34 price target, sees a very bright future indeed for the social media star. Calling Pinterest's platform "a monetization engine," the analyst believes Pinterest will grow from just a little over $755 million in annual sales today (and no profit) into a $5 billion-a-year business (with $500 million in free cash flow) over the next five years.

Baird is arguably even more optimistic, predicting Pinterest will hit $1 billion in revenue this year, and positing a $36 price target. The analyst says the company has an engaged and fast-growing user base, and is developing an ad business to drive sales.

Put a pin in Pinterest -- but don't buy it?

Not so with Pinterest's other underwriters, however. Every one of the remaining eight analysts commenting on Pinterest stock today rates the shares either neutral, hold, or the equivalent. None of these other underwriters seem confident enough in the stock they underwrote a month ago to give it a buy rating.

Why not? Well, let's see here:

Goldman Sachs, the biggest underwriter of Pinterest at the IPO, worries that after running up 40-odd percent in a matter of weeks, shares now trade at a "growth-relative premium" to other social media stocks, says StreetInsider.com (subscription required). Pinterest may have been a bargain at its IPO price of $19, but Goldman sees it as overpriced today -- and assigns the stock only a $25 target. JPMorgan, the second-biggest underwriter of Pinterest's IPO, is a bit more optimistic, and thinks Pinterest could be worth as much as $32 per share -- but still declines to endorse the stock.

And the other analysts hold similar views, positing target prices of anywhere from $25 to $32 a share:

  • Deutsche Bank likes Pinterest's long-term prospects, but says that the possibility of further "upside" looks "blurry."
  • Credit Suisse says that for Pinterest shares to appreciate further, the company will need to demonstrate rapid growth outside of U.S. borders.
  • Barclays worries about the stock's high price-to-sales ratio (currently 19 times sales).

RBC Capital notes that the stock's enterprise value-to-sales ratio is a bit cheaper -- but still pricey at "~16x." RBC also seems to question Citi's assumption that Pinterest will grow revenue at 35% annually over the next five years, although it admits that the company probably can grow both users and revenue per user at a "double-digit percentage ... until 2021."

RBC's rating sits right in the middle of the pack of Pinterest hold-raters: sector perform with a $28 price target.

The upshot for investors

Suffice it to say that Pinterest shareholders are less than pleased with this lukewarm support from the bankers who bankrolled its IPO just a few weeks ago. Pinterest stock is down nearly 9% in response to all the new ratings. But is this the right reaction to Wall Street's reticence?

It depends on how you look at it. Personally, I love Pinterest's business model, and would have loved to buy the stock at its IPO price, had I succeeded in winning an allotment of the over-subscribed issue. In contrast to social media sites like Facebook and Twitter, where advertisements are viewed as a distraction, on Pinterest, many (or even most) items "pinned" on the platform are things that people have bought or are considering buying in the future. Marketing and ads, I would argue, are basically built into Pinterest's DNA, which should provide manifold monetization opportunities.

That being said, I also understand the underwriters' hesitance to endorse a stock devoid of profits, and trading for nearly 20 times trailing sales. With Pinterest shares currently trading for more than 100 times the profit analysts think the company might earn two years from now (2021 estimated earnings are just $0.23, according to data from S&P Global Market Intelligence), it's entirely possible that despite all its advantages, Pinterest stock really is too expensive to buy.