Pinterest's (PINS 3.85%) stock hit an all-time high of $89.90 last February during the Reddit-fueled rally in meme and growth stocks. However, the stock subsequently plummeted about 70% as concerns about its decelerating user growth in a post-lockdown market spooked the bulls.
Investors might be tempted to buy Pinterest after that massive decline, but they should pay close attention to four red flags which recently appeared.
1. A series of downgrades
First and foremost, Pinterest has endured a series of price target reductions and downgrades over the past two months.
Image source: Pinterest.
Last November, Morgan Stanley analyst Brian Nowak reduced his price target from $77 to $53 but maintained an "overweight" rating on the stock. In December, J.P. Morgan analyst Doug Anmuth cut his price target from $55 to $50 and maintained a "neutral" rating.
That same month, Loop Capital's Rob Sanderson cut his price target from $66 to $50 but maintained a "buy" rating, while Citi analyst Jason Bazinet cut his price target from $48 to $42 and maintained a "neutral" rating. Earlier this month, Guggenheim's Michael Morris downgraded Pinterest from buy to neutral and cut his price target from $46 to $39.
All of these analysts expressed similar concerns: that Pinterest's monthly active user (MAU) growth would remain sluggish in a post-lockdown market, that it could lose its early mover's advantage in the "social commerce" market to nimbler social media rivals, and that its online advertising business was vulnerable to competition and macroeconomic headwinds.
Those concerns are all valid, but investors should always take Wall Street analysts' forecasts with a grain of salt -- especially since they only lowered their price targets after Pinterest's tumbling stock dropped through them:
Source: YCharts
Furthermore, even the lowest price target now represents a significant premium to Pinterest's current price -- although that could quickly change if these Wall Street analysts hastily cut their price targets again.
2. More executive departures
Pinterest needs to test out fresh strategies to curb its post-lockdown decline in MAUs, which dropped from a peak of 478 million in the first quarter of 2021 to 444 million in the third quarter. Unfortunately, Pinterest seems to be struggling to retain its top leaders as its growth decelerates.
On Jan. 25, The Information claimed that Pinterest had lost at least seven senior executives in recent weeks. That list includes:
- Corporate Development Chief - Gary Johnson
- Core Product Chief - Omar Seyal
- Creator Marketing Chief - Colleen Stauffer
- Global Business Development Chief - Ravi Adusumilli
- Content and Creators Leader - Silvia Oviedo Lopez
- Consumer and Brand Marketing Head - Celestine Maddy
- VP of Sales and Partnerships - Meredith Guerriero
All of those departures come just a few months after Pinterest's chief accounting officer Lily Yang and Evan Sharp, its co-founder, board member, and chief creative and design officer, both abruptly left the company. That ongoing exodus, which coincides with Pinterest's loss of momentum in a post-lockdown market, strongly suggests that the company could turn in an ugly fourth-quarter earnings report on Feb 3.
3. More sellers than buyers
If Pinterest's stock was getting undervalued, its insiders should be buying up more shares. But over the past three months, Pinterest's insiders still sold slightly more shares than they bought as its stock plunged 44%.
Insider sales don't always indicate that a company is in trouble. But in Pinterest's case, that lack of insider enthusiasm coincides with its executive exodus and raises a bright red flag for its future.
4. No more offers from PayPal and Microsoft
Last October, Pinterest's stock briefly rallied after a Bloomberg report claimed PayPal (PYPL +1.44%) was interested in buying the company for about $70 per share in a $45 billion deal. Microsoft (MSFT 2.17%) had also previously approached Pinterest with a $51 billion bid in 2020. PayPal subsequently said it wasn't interested in buying Pinterest "at this time," while the talks between Microsoft and Pinterest fizzled out.
Pinterest has an enterprise value of just $18 billion today, yet PayPal and Microsoft haven't made any new offers for the company. If they thought Pinterest's downturn was temporary, they would likely have stepped up again with much lower offers. But that hasn't happened yet, which suggests that either Pinterest's growth has peaked, or its potential suitors are waiting for its stock to drop even further before making a new bid.
Should investors buy Pinterest's stock today?
Analysts still expect Pinterest's revenue and earnings to grow 25% and 22%, respectively, next year -- and its stock looks reasonably valued at 20 times forward earnings. But with so many unanswered questions about its sluggish MAU growth and plans for the future, I'd rather wait to see Pinterest's next earnings report before considering it to be a turnaround play.
