With inflation at a 40-year high, many investors are concerned about the economy; some even see a recession on the horizon. So they've sought to protect their money by selling richly valued growth stocks in favor of less-speculative assets. That domino effect partly explains why Pinterest (PINS 1.22%) stock has fallen more than 70% from its high.

Of course, if that was the only reason for its decline, the stock would probably be a screaming buy. But the situation is more complicated. Pinterest saw engagement drop in 2021, and if that trend continues, this social media company could be in serious trouble.

That being said, management has outlined a solid growth strategy that could solve the problem and set Pinterest on a better trajectory.

So is this stock a buy? Let's dive in.

The bull case

Pinterest is unlike other social networks. It's not a way to connect with friends and family, but rather a tool for inspiration and productivity. Users engage with visual content like images and videos to discover ideas, find products, or learn skills. And more recently, the platform helps people take action on that inspiration.

For instance, management made Pinterest more shoppable last year. Users can now search specifically for Product Pins, meaning content that links to a retailer's product page. Users also can search the platform using text or images, and Pinterest leans on artificial intelligence (AI) to personalize the experience for each user. In doing so, its predictive engine gets a little smarter each time someone interacts with content on the platform.

Put simply, Pinterest helps people find and get what they want, and in the process, it collects a great deal of data about its users' tastes and preferences. That makes the value proposition for marketers crystal clear: They can use that data to deliver targeted ads. Better yet, because people come to Pinterest in search of inspiration, ad content feels organic, even enhancing the user experience. By comparison, ads on other social platforms can be irritating.

Building on that idea, a study from analytics company Neustar suggests that ad spend on Pinterest results in twice the return on investment compared to other social platforms. Theoretically, that should make Pinterest a key player in the quickly growing digital ad space, an industry that eMarketer valued at $240 billion in the U.S. alone last year, and $492 billion worldwide.

A person using a smatphone with icons superimposed over the image.

Image source: Getty Images.

The bear case

Last year, Pinterest's financial results looked pretty good on the surface. Revenue soared 52% to $2.6 billion, and the company posted a profit of $0.46 per diluted share based on generally accepted accounting principles (GAAP), marking the first time it achieved GAAP profitability on a full-year basis.

Pinterest also generated $744 million in free cash flow (FCF), which equates to an impressive FCF margin of nearly 29%. That's better than Snap and not far behind Meta Platforms' 33% FCF margin.

However, those results were overshadowed by waning user engagement. Pinterest ended the year with 431 million monthly active users (MAUs), a decrease of 6% from the prior year. Even worse, MAUs have decreased on a sequential basis for the last four quarters. Management blames the natural "unwinding of the pandemic," and that undoubtedly played a role. But shareholders should wonder whether that explanation fully addresses the problem.

Despite facing the same headwinds, Snap grew its daily active users (DAUs) by 20% to 319 million in 2021, and DAUs increased each quarter. Likewise, Meta Platforms grew its metric, daily active people (DAP), by 8% to 2.8 billion last year, and DAP increased each quarter.

That information also points to another problem. Pinterest reports engagement in monthly active users, while rivals like Snap and Meta Platforms report in daily active users. That raises the question: Is Pinterest a platform that is compelling enough that users log in on a daily basis? Right now, I think the answer is no. But frequent engagement is of the utmost importance in the digital ad world, so if Pinterest hopes to grow its business, engagement must improve.

A social influencer is recording a video while holding a sign that reads: "Like & Subscribe."

Image source: Getty Images.

The game plan

Management has made driving engagement a top priority. Pinterest recently launched a publishing platform that allows creators (like designers, trainers, and makeup artists) to post short videos, both recorded and live. The company believes this type of content will better inspire users, leading to "deeper and more frequent engagement."

And it hopes to become the home of taste-driven shopping. This year, it plans to revamp its AI engine, applying more data to its machine-learning models to better personalize the experience for each shopper. Pinterest has also been testing a native checkout solution that reduces friction by allowing users to make purchases without leaving the platform. The company plans to scale up native checkout over the course of the year.

If Pinterest can boost engagement and the frequency of purchases, its platform could become a more valuable resource for marketers, which would accelerate its digital ad business. And if its native checkout plan is a success, digital payments could create a second revenue stream. Shareholders should pay attention to these initiatives.

Is Pinterest a buy?

I'm a Pinterest shareholder, and I have no plans to sell -- at least not yet. But I don't plan to add to my position, either, until I see engagement improve. That being said, the stock currently trades at 6.4 times sales, near the bottom of its historical range. The only time it was cheaper was when the market crashed at the onset of the pandemic. So I think it's OK to buy a few shares right now, but I would wait to build out a full position.