Pinterest Inc (NYSE:PINS) shares have lagged the S&P 500 in 2021, generating a year-to-date total return loss of 6.9%. The stock is getting hit hard in Friday's session following a big earnings miss from Snap Inc (NYSE:SNAP).
Investors are concerned the same advertising headwinds that are negatively impacting Snap’s business will hurt Pinterest as well, but value investors may be wondering if the sell-off has created a buying opportunity.
Earnings: A price-to-earnings ratio (PE) is one of the most basic fundamental metrics for gauging a stock’s value. The lower the PE, the higher the value. For comparison, the S&P 500’s PE is currently at about 28.2, nearly double its long-term average of 15.9.
Pinterest’s PE is currently 249.39, nearly nine times the S&P 500 average as a whole. However, Pinterest's PE ratio is down 25.5% over the past two years, suggesting the stock is currently priced at the low end of its historical valuation range.
See Also: Why Jim Cramer Says PayPal Is Still A Buy Regardless Of Potential Pinterest Acquisition
Growth: Looking ahead to the next four quarters, the S&P 500’s forward PE ratio looks much more reasonable at just 20.3. Pinterest’s forward earnings multiple of 44.2 is still more than double the multiple of the S&P 500 as a whole, making Pinterest's stock look overvalued.
Pinterest’s forward PE ratio is also more than double its communication services sector peers, which are currently averaging a 20.7 forward earnings multiple.
Yet when it comes to evaluating a stock, earnings aren't everything.
The growth rate is also critical for companies that are rapidly building their bottom lines. The price-to-earnings-to-growth ratio (PEG) is a good way to incorporate growth rates into the evaluation process. The S&P 500’s overall PEG is currently about 0.9; Pinterest’s PEG is 5.06, suggesting Pinterest is significantly overvalued after accounting for its growth.
Price-to-sales ratio is another important valuation metric, particularly for unprofitable companies and growth stocks. The S&P 500’s PS ratio is currently 3.06, well above its long-term average of 1.62. Pinterest’s PS ratio is 17.55, more than five times above the S&P 500 as a whole.
Finally, Wall Street analysts do see some value in Pinterest stock over the next 12 months. The average analyst price target among the 25 analysts covering Pinterest is $68, suggesting about 15.8% upside from current levels.
The Verdict: At its current price, Pinterest stock appears to be overvalued based on a sampling of common fundamental valuation metrics.
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