Is Pinterest's Stock Overvalued Or Undervalued?

Pinterest Inc 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 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.