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2 Reasons To Avoid Pinterest

Over the last couple months, I’ve shown you stocks to avoid…

Stocks to consider buying…

And some of the best stocks related to the coming Internet of Things…  Which you can find linked further below.

All these recommendations are to help you either avoid pain and terrible stocks.  Or to help you find potentially great stocks to invest in during this pandemic.

If you do both well, it helps you earn higher than average investment returns and build wealth.

Because the fewer investment losses you have the more capital you keep. And the more capital you keep the faster you compound your money.

Today, I want to show you 2 Reasons To Avoid Investing In Pinterest so you can continue building your wealth safely.

2 Reasons To Avoid Pinterest

A few years ago, Pinterest (PINS) took the world by storm and became the next hot social media platform.

It rode this excitement into an IPO on April 18th, 2019 at a $10 billion valuation.

Since then its continued to perform well as its now worth $24.8 billion.

But is it a good stock to buy now?

No.

Here are the 2 reasons you should avoid its stock.

  1. It’s Unprofitable

In the most recent quarterly data Pinterest was unprofitable on an operating income and net income basis.  And barely positive on a free cash flow basis.

  • Its operating profit margin in the trailing twelve months (TTM) period is negative 34.9%.
  • Its net income margin in the same period is negative 32.9%.
  • And its free cash flow to sales (FCF/Sales) margin in this same time is 0.4%

EDITOR’s NOTE – Trailing twelve months just means the last 12 months consecutively.

To illustrate this…  In the last year alone Pinterest spent – lost – $428 million in operating profit to generate $1.224 billion in sales.

This means it lost $0.35 for every $1 in sales it made in the last 12 months.

You want profitability margins to be as high as possible on the positive side because that means the company is generating profits and cash flow from its operations.

For example, I look for companies to have operating and net profit margins above 10% on a consistent basis.

And I look for stocks FCF/sales margins above 5% on a consistent basis.

Why these numbers?

Because after evaluating thousands of companies over the last 13+ years of my career I estimate fewer than 5% of all companies in the world produce consistent operating profit and net margins above 10% over extended periods.

And far fewer than 5% of all companies consistently have higher FCF/sales margins than 5% on a consistent basis too.

When a company surpasses these thresholds, it means the company is a great operating business.

And these profits allow the company to continually reinvest in and grow its businesses in a healthy way.

But if a company doesn’t surpass these thresholds – like Pinterest – this leads the company to having less money to reinvest in the business to continue competing well.

Plus, its enormously overvalued too…

2. Its Overvalued

Its current P/E is 75.9.

Its current P/CF is 616.1.

And its current forward P/E is 243.9.

I look to buy companies with valuations below 20 on all these metrics to consider the company undervalued or at worst fairly valued…

Pinterest is well above this threshold.

Why below 20?

Because that means the company is at worst fairly valued… And if its significantly under 20 that means the company is undervalued.

When a stock is fairly valued or undervalued it gives you more margin of safety in investing terms.

This means you have a better chance of earning higher returns owning its stock over time.  And these things combined make the stock a less risky investment.

With Pinterest being overvalued it means there is no margin of safety owning its stock… That you have a far lower likelihood of making money owning its stock over time.  And these make investing in its stock riskier.

None of this means I think Pinterest stock will implode over time.  I don’t.

But it’s so overvalued that there is zero margin of safety in buying its stock today.  Combine this with its unprofitability and these 2 reasons are why I recommend you avoid buying its stock.

Use the following links to some of our recent articles to learn other ways to protect yourself and your investments in these uncertain times. 

Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.


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