Wall Street isn't sure what to make of Pinterest (PINS -0.64%) stock these days. Falling demand for digital advertising as businesses fear a recession might be in the cards is putting pressure on the social media company and contributing to its net losses.
But in the wake of the soaring growth that it enjoyed during the earlier phases of the pandemic, Pinterest isn't enduring as severe of a growth hangover as some of its peers. And its new CEO has some ambitious plans to expand the business over the next several years.
With that big picture in mind, let's look at how attractive the stock is as a buy right now.
The latest trends
Pinterest's last earnings update was a mixed bag. While sales grew 10% in the second quarter, that expansion pace was much slower than shareholders had seen recently. The company is shedding users, too, and advertising spending on the platform is slowing.
Yet, its user base of 433 million is still far higher than it was prior to the pandemic. And Pinterest's monetization metrics are impressive. Average revenue per user grew 17% across the business and jumped 20% in the U.S. market.
These successes came despite falling demand for advertising in many markets and were powered by improvements to its shopping platform. "We continue to make Pinterest the home for personalized, taste-driven shopping," CEO Bill Ready said in the Q2 letter to shareholders.
Cash and profits
The main factor pressuring the stock today is that Pinterest is now posting losses rather than generating steady profits. Its operating loss was 5% of sales in the second quarter compared to a 12% profit a year earlier. And in the current macroeconomic environment, Wall Street doesn't have much patience for businesses that are booking losses -- even if their top lines are growing.
But the losses are modest and are being driven by management's spending on promising growth initiatives like greater shopping integration and the use of AI to populate users' feeds. Pinterest is in a flexible cash position, after all, with over $2.5 billion of cash on the books and positive cash flow of $333 million over the last six months.
PINS Cash from Operations (TTM) data by YCharts
Valuable growth
Pinterest has forecast more of the same general trends through the second half of 2022, with sales likely to expand slowly while expenses grow a bit faster. That result would probably spell weaker earnings this year while potentially laying the groundwork for expanding margins in 2023 and beyond.
Investors might want to simply follow this stock for the next quarter or two, especially now that the company is under new leadership, to get a better idea about its recovery prospects. Sure, it is encouraging that users are spending more on the platform. And Pinterest isn't facing a cash crunch that might cause problems for it during a recession.
However, the business hasn't demonstrated a clear path back toward expanding its global user base. And investors can't know yet whether its latest growth initiatives will pay off at a time when many other digital platforms are looking for ways to cut costs.
Taken together, these factors suggest that Pinterest is a worthwhile stock to keep on your watch list right now, but a risky one to make a big part of your portfolio.
