Pinterest (PINS -1.41%) has taken investors on a wild ride since its initial public offering (IPO) in 2019. The social media company's stock soared soon after its public debut thanks to pandemic-driven tailwinds and market-wide momentum for growth stocks. But fortunes reversed as engagement tailwinds receded and investors fled from growth-dependent tech stocks. Pinterest stock now trades down 4% from the market close on the day of its IPO, and it's lost nearly three-quarters of its value since hitting a lifetime stock price high above $89 per share in February 2021.

Should investors treat the big valuation pullback as a buying opportunity, or is this a case where the business slipping will lead to continued underperformance for the stock? Read on and two Motley Fool contributors discuss the bullish and bearish catalysts that could shape the direction of Pinterest stock going forward. 

Bull case: Take advantage of the discount

Jeremy Bowman: Like the rest of the social media sector, Pinterest stock has been hit hard by the broader market sell-off this year.

After the business boomed through the earlier stages of the pandemic, its user base has since declined, revenue growth slowed dramatically, and profitability fell. Despite those headwinds, there's reason to believe that Pinterest is turning the corner, and investors seem to be overweighting short-term headwinds and ignoring the long-term potential of the company.

First, after several quarters of declines, its user base may finally be stabilizing. In the second quarter, monthly active users (MAUs) were 433 million, equal to the first quarter, which paves the way for a return to growth. The stock also recently got an upgrade from analysts at Goldman Sachs, which cited improved user-growth trends.

Other data also show the outlook for Pinterest improving as well. According to data analysis firm Sensor Tower, time spent on the app increased 11% in August, its best performance in a year, and its new invite-only, collage-making app, Shuffles, also seems to be gaining traction, according to early reports.

Activist investor Elliott Management has taken a stake in the company and aims to improve monetization or push for a sale, which could net investors an easy win.

Additionally, the company has proven its business model is profitable, even in a difficult environment. In the second quarter, it reported adjusted net income of $77.4 million on revenue of $665.9 million, equal to a 12% profit margin.

Based on the stock price and its near-75% decline from its peak last year, Pinterest shares look very reasonably priced. Its price-to-earnings (P/E) ratio is 40 based on adjusted earnings-per-share expectations of $0.57 for the year.

With the short-term headwinds seemingly fading, the business could soon accelerate. If it does, the stock has a lot of upside potential ahead of it. 

Bear case: A rebound for the business isn't a sure thing

Keith NoonanPinterest's social media platform attracted a large user base, but it looks like growth could be much more difficult to deliver going forward. While the company's monthly active user count was flat sequentially at roughly 433 million in Q2, it was down 5% year over year, and it's not clear that the business will return to substantial MAU growth. The company has been losing users in North America and Europe and adding users in other international markets, which will likely lead to continued pressure on earnings if the trend persists. 

North America Q1 MAUs Q2 MAUs
North America 94 million 92 million
Europe 120 million 117 million
Rest of World 220 million 223 million

Table by author; Data source: Pinterest.

Pinterest typically generates more revenue from users in its North American and European geographic segments, and MAUs in these markets continued to decline on a sequential basis in Q2. Even if the growth in other markets pushes the business back to user growth, sales and earnings performance could continue to be underwhelming if Pinterest continues to lose users in the U.S., Canada, and Europe. 

The company is finding some success boosting digital advertising sales and overall average revenue per user, but macroeconomic headwinds could stymy gains on those fronts. With the potential of a prolonged recession looming, advertisers could cut back on spending and cause Pinterest's business performance to come in softer than anticipated.

While the company has been posting consistent profits on an adjusted basis, Pinterest still has a growth-dependent valuation. Non-GAAP (adjusted) net income fell roughly 54% year over year in Q2, and the combination of macroeconomic pressures and MAU trends could create continued bearish momentum. With the company posting unimpressive single-digit revenue growth and declining earnings, Pinterest stock could continue to fall if economic conditions pressure the business or continue to spur sell-offs for growth stocks at large. 

Should you buy Pinterest stock?

For investors who see value in the company's platform and large user base, recent sell-offs could present an opportunity to buy Pinterest stock at heavily discounted prices. Engagement tracking and institutional support could signal that the business is on the verge of getting back to stronger growth.

On the other hand, investors who are concerned about the user-base picture or the potential for macroeconomic headwinds to derail the company's growth initiatives should probably approach the stock with caution. Pinterest has built an impressive social networking business, and sell-offs pushed its valuation down to levels that leave room for substantial upside, but some big risks remain.