1 More Reason To Avoid Pinterest After Earnings
Back In September I showed you 2 Reasons To Avoid Pinterest to protect your retirement portfolio…
Today, I show you 1 More Reason To Avoid Pinterest after its latest earnings…You can read the original article in full at the link above.
But if you don’t want to; here’s a quick recap of why I said you should avoid it back in September.
- 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.
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.
This thesis to avoid Pinterest due to its unprofitability and huge overvaluation continued to play out on October 28th, 2020 when it released its most up to date quarterly earnings.
Revenue grew 58% in the year to year quarterly period to $443 million.
Monthly active users grew 37% in the year to year quarterly period to 442 million.
While it lost $94 million in net profit in the quarter.
This while its stock continued to rise since September.
Which means its even more overvalued now than it was back in September when I first told you to avoid its stock.
Its P/E is now 190.4.
Its P/CF is 940.
And its forward P/E is 99.
These issues continuing – and getting even worse since September – make owning Pinterest stock even riskier than it was then.
And for these reasons I recommend you continue avoiding its stock.
Plus, I’ve already found better potential investments for you…
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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.