Pinterest (PINS) Attracts Short-Term Traders But the Wider Outlook is Questionable

Based on the headline numbers, image sharing and social media service Pinterest (PINS) appears to be firing on all cylinders. Recently, the company posted what some analysts described as a “spectacular” set of results for its third-quarter earnings report. As well, the fundamentals translated into positive developments for the technicals, with PINS stock gaining 17% in the trailing five sessions since Nov. 15.

However, a question remains: is it time to wager on Pinterest and hope that this recent spike represents a turning point? Or, on the other hand, should investors be skeptical given the severe global economic headwinds? After all, sharing images of desired products or vacation spots won’t mean much if you and members of your network are standing in the unemployment line.

For now, the framework appears to decisively favor PINS stock. As mentioned earlier, the Q3 earnings results delighted onlookers. Pinterest posted non-GAAP net income of $76.5 million or 11 cents per share, beating out the consensus target for earnings per share by 6 cents.

On the revenue front, the company generated $684.6 million on the top line, up 8.2% on a year-over-year basis. In addition, the latest tally beat the consensus target of $665 million.

According to Zacks Equity Research, “Monthly active users (MAUs) remained relatively flat at 445 million globally as the unwinding of pandemic restrictions led to lower customer engagements on desktop and web as users spent more time outside.” While this might be characterized as a small blight, it’s also fair to point out that in Q2, MAUs pinged at 433 million.

All in all, the narrative seems encouraging for PINS stock, which perhaps unsurprisingly attracted interest among options traders.

Bulls See a Quick Opportunity in PINS Stock

Following the close of the Nov. 15 session, PINS stock represented one of the highlights regarding unusual options activity. Specifically, traders targeted the $26.50 calls with an expiration date of Nov. 25, 2022 – nine days from the time the order was placed.

Moreover, volume reached 3,024 contracts against an open interest reading of 107. The bid-ask spread as represented by the midpoint price (85 cents) came out to 4.71%. While it wasn’t the widest spread for the day, it certainly wasn’t the narrowest. The difference between the two stats reflects underlying liquidity.

For the record, PINS stock closed at $26.29. Therefore, shares would only need to rise by about 0.80% to be at the money.

The apparent bullishness toward PINS stock also aligns with the current predominant trend in the options market. According to data from Barchart.com, the put/call open interest ratio is 0.46. Typically, the threshold that separates optimism and pessimism is 0.70, with figures lower than this level indicating that more traders are buying call options than puts.

What’s more, Wall Street experts peg PINS stock as a consensus “moderate buy.” However, the picture is nuanced. Three months ago, the consensus rating remained the same, breaking down to three strong buys and 17 holds. In the current month, the breakdown is 4 strong buys and 14 holds.

Still, with so many holds outweighing the buys, investors need to read between the lines. Usually, a hold rating means the covering analyst doesn’t believe in the firm but wants to maintain diplomatic relationships with their clients.

A Matter of Economics

As mentioned earlier, economic incentives underline interest in PINS stock. By sharing the products and places people desire, the ecosystem grows. However, these shared goals also must be realistic. If consumer sentiment fades or economic obstacles rise, Pinterest may incur a relevancy problem. And that’s one of the main concerns I have for the company longer term.

For instance, when Pinterest’s MAUs increased from 367 million in Q1 2020 to 478 million in Q1 2021, the purchasing power of the dollar “only” declined by 1.8%, which is fairly reasonable. However, when MAUs declined from the aforementioned 478 million to 445 million in Q3 2022, the greenback’s purchasing power slipped by a stunning 11%.

In other words, dramatically eroding purchasing power (or rising inflation) corresponded with lower engagement rates at Pinterest. Currently, the Federal Reserve is aggressively implementing interest rate hikes, controlling escalating prices. This helps explain why MAUs ticked higher on a quarter-to-quarter sequential basis.

Unfortunately, though, the data suggests that economic conditions for consumers must continue to improve substantively for PINS stock to keep moving higher. Frankly, I’m not sure if I have the confidence that circumstances will improve as such. Therefore, while PINS may offer a quick buying opportunity, investors should be careful about longer-term exposure.

• Pre-Market Brief: Stocks Move Higher As Ebbing Inflation Boosts Sentiment
• Stocks Finish Higher as Inflation Concerns Ebb with Soft PPI Report
• Here's a Real Estate Play That's Got a Long Runway for Growth
• Optimism about Nvidia Improves but Risks Remain