Social media company Pinterest (PINS -1.34%) saw its stock price soar 20% immediately after it released its earnings report for the second quarter of 2022, enough to recover some prior losses and put the stock up 13% in total over the past month. A lot is happening at the company; new leadership, an activist investor, and strategic changes are coming. Those changes are likely in response to the stock being down 37% since January.

Are Pinterest investors seeing clear signs of a massive comeback? Or is the post-earnings pop a mirage that will soon disappear? It's likely too early to answer definitively either way. But there are at least three reasons investors should remain cautious about the stock right now.

1. Intent does not equal execution

Pinterest recently brought on a new CEO, Bill Ready, who came from previous executive roles within the financial technology space, including executive positions at Alphabet and PayPal Holdings, as well as CEO of PayPal's Venmo.

Former CEO Ben Silbermann spoke about the leadership transition in the company's second-quarter earnings conference call, citing a desire to make Pinterest a more competitive e-commerce company where users can follow through on their inspirations on the platform with actions and purchases. Bill Ready's expertise in those areas put him in the position of CEO.

Bill Ready also spoke on the second-quarter call, discussing how Pinterest's platform enables users to save content, and how he believes that it's fertile ground for advertiser and shopper spending. He aims to evaluate and finalize a plan of action over the coming months.

Wall Street's positive reaction is a sign that the potential changes are welcome, but investors should remember that changes don't guarantee success. Pinterest will need time to roll out any proposed strategy and see measurable results. That's not to say they won't work, but investors are betting on potential and not results at this moment.

2. Pinterest's user base is shrinking

The promise of the future also doesn't change the fact that engagement on Pinterest is suffering. Monthly active users fell 5% year over year in the second quarter to 433 million, the same number as in the first quarter.

More troubling is that users declined 8% year over year in the U.S. and Canada, Pinterest's most important demographic. The average user in the U.S. and Canada generated $5.82 in revenue in the quarter, miles ahead of Europe, its next closest segment, which had just $0.86 per user.

Continued user losses in the U.S. and Canada could dramatically affect the company's overall revenue per user and total revenue as a result. It's good to see that the number of users was stable from the first quarter to the second, but getting user growth going again in the U.S. and Canada is crucial.

3. Pinterest's costs are rising

Pinterest's revenue grew 9% year over year in the second quarter to $666 million, but its costs are rising faster across the board. The company's adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) declined 46% from the year-ago quarter.

Pinterest's four major expense categories all increased year over year, including:

  • Cost of Revenue: up 29%
  • Research & Development: up 37%
  • Sales & Marketing: up 27%
  • General & Administrative: up 35%

Investing in the business can be good if it increases revenue. Watching the relationship between revenue growth and expenses will be essential to ensure that happens. Growth could become an uphill battle if Pinterest doesn't reinvigorate its user growth.

The bottom line

A work in progress might best describe Pinterest these days. The stock has fallen more than 70% from its high and trades at a price-to-sales ratio of almost 6, on par with the COVID-19 crash in 2020.

The lower valuation probably reflects a lot of the risks I mentioned above. But the company likely needs several quarters of execution, member growth, and financials trending in the right direction again for the recent rally to become a full-fledged comeback. It's still way too early to tell, which is why investors should remain cautious for the time being.