What happened

Shares of Pinterest (PINS 1.72%) jumped 22.5% this week, according to data from S&P Global Market Intelligence. The photo, activity, and shopping social media company reported second-quarter earnings, which investors took positively. As of 1:17 p.m. ET on Friday, Aug. 5, the stock is up 16.2% this week.

So what

After the close on Aug. 1, Pinterest reported its financial results for the three months ending in June. Revenue grew 9% year over year to $666 million, while the company moved to unprofitability with a net loss of $43 million. Apparently, this was better than what investors expected, because they decided to bid up the stock by over 10% the day of the report.

However, along with the unprofitability, Pinterest had some concerning red flags in its Q2 report. Most concerning is monthly active users (MAUs), which declined 5% year over year in the quarter to 433 million. This was a broad-based decline across the globe, with North America MAUs down 8%, Europe down 4%, and the "rest of the world" segment down 3%. Pinterest has been able to counter these MAU declines with strong growth in average revenue per user (ARPU), up 17% globally in the quarter. While nice to see, a declining user count is detrimental to a social media company. ARPU growth cannot solve this problem indefinitely.

Pinterest is profitable on a cash flow basis, generating $333 million in operating cash flow through the first six months of this year. However, a lot of this cash flow comes from noncash stock-based compensation expenses and beneficial changes in working capital. The working capital changes are only short-term, and the noncash stock-based compensation will show up in share dilution. For reference, Pinterest's shares outstanding are up 27% since it went public in 2019. This will be a headwind to free cash flow per share, which is how shareholders get value from their stock holdings over the long term. 

PINS Shares Outstanding Chart

PINS Shares Outstanding data by YCharts

Now what

As of this writing, Pinterest trades at a market cap of $15.2 billion and a price-to-sales ratio (P/S) of only 5.6. With a high gross margin, this indicates Pinterest stock could be cheap if it can continue growing revenue and achieve true operating leverage. But don't fool yourself too quickly. Pinterest has never proven it can generate true profitability consistently, especially to warrant a $15.2 billion market cap. Combine this with a declining user base, and Pinterest stock doesn't look appetizing right now.