Question: Why would anyone pay 17 times earnings for Johnson & Johnson stock when Pinterest stock is available at a more attractive valuation of 11 times earnings? Most wouldn’t—especially when considering three key points:
- Growth:
- Cash Flows:
- Pinterest demonstrates robust cash flow, converting a significant portion of its revenues into cash. Its average operating cash flow (OCF) margin stands at 26%, which is comparable to Johnson & Johnson’s 28%.
- Furthermore, Pinterest’s free cash flow margin of 25% surpasses Johnson & Johnson’s 20%, indicating that Pinterest is more efficient at converting its revenues into readily available cash.
- Financial Stability:
- Johnson & Johnson certainly boasts a robust balance sheet, holding a substantial $39 billion in cash. In contrast, Pinterest has a significantly smaller cash reserve of $2.5 billion. With its larger cash reserves, Johnson & Johnson’s cash as a percentage of assets stands at 20%, which is stronger than Pinterest’s 11%.
- However, Pinterest’s financial leverage paints a different picture. With a mere $144 million in debt, its debt as a percentage of equity is an impressively low 0.1%. This is significantly better than Johnson & Johnson’s 14%, which carries a hefty $52 billion in debt.
- In essence, while Johnson & Johnson has more readily available cash, Pinterest demonstrates robust financial stability due to its minimal debt burden.
But Then, Is PINS Stock A Safe Bet?
While Pinterest shows promise, its stock (PINS) isn’t without significant risk, as its past performance during market downturns highlights.
For example, during the 2022 inflation shock, PINS plummeted a dramatic 81%. This was a far steeper decline compared to Johnson & Johnson’s 22% drop and the S&P 500’s 25% peak-to-trough fall.
Similarly, the COVID-19 pandemic market correction saw PINS stock fall by 52%. Again, this was a much more pronounced decline than Johnson & Johnson’s 28% drop and the S&P 500’s 34% peak-to-trough decline.
These instances demonstrate Pinterest’s higher susceptibility to market volatility compared to more stable investments. For a deeper dive, you can explore our Buy or Sell Pinterest Stock dashboard. Separately, check out – What’s Happening With MSFT Stock?
Pinterest’s Growth Potential
Pinterest’s visual discovery platform is well-positioned for substantial growth by expanding various revenue streams. The company’s advertising business is set to thrive due to enhanced shopping features and improved targeting. Brands are increasingly using Pinterest’s user base, known for high purchase intent, to drive product discovery and sales.
The platform’s expanding creator economy, powered by features like Idea Pins and creator monetization tools, is expected to significantly boost user engagement. Furthermore, Pinterest’s international expansion and growing e-commerce integrations are projected to accelerate revenue growth. This is particularly true as Pinterest transforms its large global user base into shopping-centric experiences, which, in turn, increases advertiser spending and affiliate commerce revenue.
What Could Go Wrong?
Pinterest faces several potential risks that could hinder its growth. A primary concern is the deceleration of revenue growth if macroeconomic pressures worsen, leading advertisers to tighten their budgets. Because Pinterest heavily relies on advertising revenue, it’s especially vulnerable to shifts in digital marketing spending and changes in user behavior.
Additionally, there are execution risks related to Pinterest’s international expansion and efforts to help creators earn money. If the company’s investments in new markets and creator tools don’t generate the expected returns, it could be challenging to justify these expenses, especially as Pinterest faces pressure to maintain profitability.
And of course, there’s always the unexpected. If you’re not comfortable with a potential 60% or even more drop in value, Pinterest stock might not be the right fit for your portfolio. The biggest mistake you could make is selling when the stock is at its lowest.
Instead, if you find yourself in such a downturn, consider consulting a seasoned financial advisor, especially one with experience navigating bear markets. They can help you explore strategies like the Trefis HQ strategy and other smart tactics to manage volatility. A crucial lesson here is that staying invested during turbulent times can lead to significant gains in the long run. Ultimately, for patient, long-term investors with a 3-5 year investment horizon, Pinterest could still present a compelling opportunity today.