Since hitting a bottom of 94p last month, shares in International Airlines Group (LSE: IAG) have recovered by more than 30%. This comes on the back of positive updates from airlines, with IAG unveiling its own results last week. With that in mind, I think IAG shares are worth looking at.

Flying numbers

As anticipated, the conglomerate surpassed analysts’ expectations. The group’s Q3 update confirmed that demand for travel remains robust, despite the recessionary backdrop. With passenger numbers edging closer to 2019 levels, investors rewarded IAG with a jump in its share price.

Additionally, The FTSE 100 firm has finally returned to profitability for the first time since its pre-pandemic days. CEO Luis Gallego even upgraded the airline group’s full-year profit outlook. The board now expects its pre-exceptional operating profit to be approximately €1.1bn, along with a “significantly positive net cash flow”.

Easy does it

Aside from its results, it’s worth noting that the IAG share price has surged by a further 8% since its Q3 update. Why has this been the case? Rumours have been flying around about a potential takeover of easyJet, with Gallego making no secret of IAG’s desire to continue expanding on the earnings call last week.

We are a platform for consolidation, and we’ll only do what makes sense but we see there are opportunities to be stronger. IAG is a group that wants to consolidate the industry.

CEO Luis Gallego

This is exciting news, potentially allowing IAG to expand market share. However, I’m not so keen on a possible takeover for a couple of reasons. For one, authorities may veto such a deal due to competition concerns. The second would be IAG’s financial priorities — the firm still has a mountain of debt to pay off.

Clear for take-off?

So, should I buy IAG shares following all the positive news? There’s certainly a buzz in the air given the positivity surrounding robust travel demand, and I can understand why. That being said, the state of its balance sheet remains in a terrible state. Although its finances have improved over the last year, it has an eye-watering debt-to-equity ratio of 1,124%.

While I’ve no doubt the company will continue to gain momentum going into the holiday season, I remain pessimistic on its earnings potential afterwards. Debt repayments will start to rack up going into 2023 and beyond, with plenty of headwinds still worth considering.

Also, business travel still lags behind its 2019 figures and needs to rebound at a much faster pace to compensate for a potential drop-off in leisure travel during a recession. This is because demand for business travel tends to be inelastic and has higher revenue per ASK. Moreover, travel to Asia remains muted due to Covid lockdowns. And with Heathrow Airport potentially reinstating its passenger cap due to staff shortages, this could limit IAG’s top and bottom-line growth.

All these reasons have led to brokers such as Deutsche Bank rating the stock a ‘hold’, despite the shares having an average price target of £1.30. Nonetheless, I’ll be putting IAG shares on my watchlist for the time being. In the meantime, I might wish I was among those who bought the stock last month!

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John Choong has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Rolls-Royce (LSE: RR) is scheduled to unveil its Q3 results later this week. With that in mind, I’ll be assessing what to look out for, whether the Rolls-Royce share price can recover, and if I’ll be starting a position.

Travel tailwinds

Given that the Derby-based manufacturer earns the bulk of its revenue from its Civil Aerospace segment, it’s only natural for me to pay attention to how well the travel sector has been doing. Major airlines reported rosy numbers last month, which sparked a rally in the Rolls-Royce share price. This is because more flying hours mean the FTSE 100 firm will be servicing more engines.

With no signs of travel demand cooling down, analysts are expecting the engine maker to show gradual signs of recovery post-pandemic. Therefore, the company is expected to hit the guidance it set out for itself by the end of the year.

Nonetheless, it’s worth noting that although travel demand continues growing, the industry is still lagging behind its pre-pandemic numbers. This means a ceiling for the Rolls-Royce top line, thus limiting the recovery of its shares. On top of that, it’s also been facing a number of supply chain issues, which have impacted its ability to service and manufacture engines at a steady pace.

Energetic prospects

Aside from Civil Aerospace, the group is expected to build on the strong growth in its Power Systems segment as well. Since Rolls-Royce released its half-year results, it’s been working hard to implement its MTU engines and technologies for its naval clients. Moreover, it’s been developing a line of sustainable fuels for aircraft and yachts, which could help boost growth in the firm’s energy segment over the long term.

And with the Russia-Ukraine war unfortunately ongoing, higher military spending should see the firm retain a significant level of income. Most recently, it’s been able to secure a number of military contracts that further adds to its order backlog of over £50bn.

Stalling behind consensus

With all that in mind, can the Rolls-Royce share price recover? Well, there’s certainly potential given the ongoing travel rebound and tailwinds from its Defence and Power Systems segments. However, I think the initial excitement has already been priced in given the recent rally over the past week.

A recovery rally could be on the cards, but I believe that investors will still have to see significant improvement to Rolls’ current financial state before pushing its stock back up to £1. This is especially so given the current macroeconomic environment. After all, its balance sheet remains far from ideal, with negative shareholder equity and a staggering debt pile of £6.24bn.

Either way, analysts’ consensus for Rolls’ full year remains modest. So far this year, it’s earned £5.31bn in revenue, which means that the next two quarters will have to show stronger revenue growth in order to meet analysts’ consensus. Along with that, Rolls-Royce has lost 2.24p per share in its first six months. As such, investors will be hoping for its bottom line to improve drastically.

Either way, its shares currently have an average price target of 83p, which doesn’t present much of an upside from current levels. And with the likes of JP Morgan and Berenberg advocating a ‘hold’ rating, I won’t be investing in Rolls-Royce.

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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. John Choong has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Alphabet (NASDAQ: GOOGL) stock crashed after an unsatisfactory third quarter. Since then, shares in Google’s parent company have been exchanging hands below $100, and are down by more than 30% this year. As I break down the conglomerate’s third-quarter results, I’ll determine whether I think its shares are still worth buying for my portfolio.

Misses across the board

Alphabet missed analysts’ expectations by quite a large margin. The main point of disappointment was the monumental slowdown in revenue growth. This came in at 6% compared to 41% the year before. Meanwhile, its bottom line suffered a huge decline of 24%.

Advertising is Alphabet’s largest revenue generator. As such, it was a relief to see some modest growth there. But what was disappointing to see was the drop in YouTube revenue, which further soured investor sentiment surrounding Alphabet stock.

Having said that, the board attributed the overall drop in revenue growth to a number of factors. The first was a decrease in overall ad spending from businesses. This was further exacerbated by a strong US dollar which made revenue conversion from foreign currencies to the greenback more expensive. Additionally, Play Store revenues saw a decrease as gaming interest declined.

Time is ticking on Shorts

Moving onto YouTube, it was refreshing to see the platform’s short-form content continuing to gain momentum. CEO Sundar Pichai also disclosed that ads on Shorts were launched in September, which finally opens up a revenue stream for the new segment. Moreover, YouTube will start sharing ad revenue with its creators from next year, in a bid to fend off competition from TikTok.

This news should’ve brought a jump to Alphabet stock. However, an excellent question from Morgan Stanley analyst Brian Nowak derailed any excitement. Nowak questioned whether the increased user time spent on Shorts was at the expense of YouTube watch time itself, to which CBO Philipp Schindler reluctantly confirmed.

Shorts viewership grew as a percentage of total YouTube watch time.

CBO Philipp Schindler

This was most likely one of the main reasons behind the drop in YouTube revenue in Q3. After all, traditional, longer YouTube videos have a tendency to generate more advertising revenue than its short-form counterpart.

Therefore, YouTube will have to find ways to monetise Shorts at the same rate as its traditional video formats, as TikTok continues to snatch revenue away. Either way, I’m expecting the introduction of new ad formats such as discovery ads, video action campaigns, product feeds, and live commerce to help YouTube’s revenue rebound.

Every Cloud has a silver lining

Despite the generally downbeat numbers, shareholders did have something to celebrate. Google Cloud has long been touted as a long-term growth catalyst for Alphabet stock, and its Q3 numbers showed just why, as revenue grew by an impressive 38%.

Nonetheless, Cloud’s overall net income took a step back, as it finished Q3 with a $699m loss. Its revenue still grew at a faster pace than in previous quarters, however. Not to mention, given that the majority of its expenses were investments in data centres and recruitment, profitability should be achievable once expenditures start to taper off.

Furthermore, Google Cloud has a strong revenue backlog of approximately $26.2bn, ensuring strong future growth momentum, which should be further aided by the recent acquisition of Mandiant. This new asset adds cybersecurity to Cloud’s list of ever-expanding features as an open platform, improving the product’s competitive edge.

Ruthless costs

So, what were the reasons behind Alphabet missing its bottom line estimates then? Well, the company’s operating and capital expenditures saw increases of 27% and 33%, respectively. Most of these expenses were attributed to investments in data centres, so this is understandable given the aggressive growth in Google Cloud.

That being said, I’m puzzled by the acceleration in headcount growth. The Nasdaq-listed firm added 12,765 workers in Q3, when Pichai mentioned his intention to slow down hiring in Q2. On the earnings call, Pichai was asked to provide examples of internal key performance indicators or quantifiable analysis to justify the hiring. Instead, he gave a rather generic response, which doesn’t exactly soothe investors’ nerves when Alphabet stock is already down by more than 30% this year.

Talent is the most precious resource, so we are constantly working to make sure everyone we have brought in is working on the most important things as a company.

CEO Sundar Pichai

Buy the dip?

With all that in mind, do I still rate Alphabet stock a buy for my portfolio? Well, the firm didn’t have a terrible quarter as a whole, especially given the current recessionary backdrop. In fact, revenue actually grew 11% on a constant currency basis.

Besides that, further improvements in Search, Shorts, and Cloud show that the future remains bright. And with its balance sheet still in a robust state, I’ve no doubt that Alphabet will be able to plow through a potential recession without any issues.

On the flip side though, questionable decisions, particularly surrounding headcount growth, and the vague answers to questions don’t give me as much confidence in the board as I used to have. Even so, I’m still hopeful that Alphabet will be able to deliver excellent return on investment, given its historical return on assets (18.3%) and return on equity (26.4%). Not to forget, the tech giant still has $43.5bn worth of stock buybacks to complete.

Most importantly, Alphabet stock still has the backing of many brokers. The likes of Citigroup, Wells Fargo, and Bank of America opted to reiterate their ‘buy’ ratings for the stock. For that reason, I think the downside risks for Alphabet remains low for the time being. And with a historically low forward price-to-earnings (P/E) ratio of 18 and an average price target of $130.20, I’ll be looking to buy more Alphabet stock for my portfolio.

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Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. Bank of America is an advertising partner of The Ascent, a Motley Fool company. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Citigroup is an advertising partner of The Ascent, a Motley Fool company. John Choong has positions in Alphabet (A shares). The Motley Fool UK has recommended Alphabet (A shares) and Alphabet (C shares). Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Rolls-Royce (LSE: RR) shares last saw the £1 mark in late February. Nonetheless, the group continues to innovate its offerings outside of its core business area. So, could new ventures and innovations help lift the Rolls-Royce share price back up to higher levels?

Tailwinds not dissipating

Rolls-Royce earns the bulk of its income from its Civil Aerospace division. Therefore, it’s expected to continue benefiting from the rebound in travel demand. Longer flying hours for airlines and private jets should greatly benefit the company’s top line.

The likes of Delta, United Airlines, and American Airlines have reported no slowdown in long-haul international travel thus far, and IAG is expected to report the same when it unveils its Q3 results later this week.

As such, it’s a bit of a head-scratcher to see the Rolls-Royce share price drop down to 70p from £1. This is especially the case when considering passenger seat numbers. These have increased by approximately 15% since the end of February. Thus, I’m expecting Rolls-Royce’s top line to continue recovering when it reports its Q3 results next month.

Energised for innovation

Nevertheless, it’s the firm’s Power Systems division that excites me. In its half-year results, the branch saw an impressive 20% growth year on year. Building on this, I believe that there are a number of key breakthroughs that could spark a fundamental improvement to Rolls-Royce’s earnings potential.

The biggest would be its ambitious plans to build Small Modular Reactors (SMR). Given the importance surrounding energy independence in light of the Russia-Ukraine conflict, these nuclear SMRs could be groundbreaking and bag massive profits, if successful.

Additionally, Rolls-Royce recently shared a number of interesting developments. The British firm has been successfully implementing its MTU engines and technologies for its naval clients. Moreover, it’s developing a line of sustainable fuels for aircraft and yachts. Consequently, Rolls-Royce signed an agreement with easyJet to pioneer the development of hydrogen combustion engine technology.

Sky’s not the limit for now

With all that in mind, will I be buying Rolls-Royce shares for its potential? Well, the conglomerate is leading the charge in the clean energy space with its radical innovations. Admittedly, these do excite me as I believe the upside potential for the stock could be incalculable, if successful.

But even so, I still can’t turn a blind eye to the state of its balance sheet. With negative shareholders’ equity and a staggering pile of debt, Rolls-Royce is going to struggle to fund all of its promising ventures if its financials don’t improve drastically.

The recent sale of ITP Aero worth €1.8bn should help shore up its finances slightly. However, management will still have to hope that free cash flow continues to improve at a steady pace, or risks missing its debt repayments in the near future.

Having said all that, as much as I’m a big fan of the manufacturer’s visions, I won’t be investing in Rolls-Royce shares today due to the state of its finances. Not to mention, brokers from JP Morgan and Deutsche have an average price target of 75p for the stock, which doesn’t present much upside from the stock’s current price.

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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. John Choong has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The cost-of-living crisis has had British investors on edge. I think this is the main reason why Dunelm (LSE: DNLM) shares have plunged by more than 40% this year. But after the company released its Q1 trading update today, the question is, will I be buying more Dunelm shares?

Stable legs

The retailer’s latest trading numbers were slightly disappointing. Sales figures saw an accelerated drop since the company’s last quarter. On a year-on-year basis, total sales went from a 6% fall in Q4 to a drop of 8% this quarter. Additionally, gross margins saw a 1.3% decline. However, it’s worth noting that these figures were still largely in line with analysts’ expectations, which is why Dunelm shares are largely unmoved.

That being said, I should point out that this year’s numbers are being compared to a very strong previous year. Nonetheless, when compared to pre-pandemic sales figures, Dunelm sales are actually up 36%. This shows the company’s strength, and that it can hold on to customers despite challenging times.

Silver linings

There were some plus points within its gloomy sales numbers, however. For one, Dunelm said its full-year outlook remains in line with what it shared last month. This comes at a time when other retailers are downgrading guidance. The board also mentioned that it’s well hedged for its full year, despite a weaker pound.

Moreover, management mentioned that it continues to see robust sales across its retail channels and all categories. More importantly, it’s been seeing “a very good response” to its seasonal ranges from customers.

Furthermore, Dunelm’s performance has fared relatively well against the rest of the industry. There’s no doubt that the home improvement sector has taken a hit given the current recessionary backdrop. Data since April indicate that household goods stores have been underperforming 2019 levels. But when comparing these to the figures Dunelm shared, it’s safe to say that the company has been doing fairly well, given how far ahead it is of pre-pandemic levels. This supports CEO Nick Wilkinson’s view that the business is delivering good value to customers.

Planning an exit

Even so, will I be still be buying Dunelm shares? Well, the company has a decent balance sheet with a healthy debt-to-equity ratio of 29.6%, showing that it has solid foundation to weather a recession. Nevertheless, its cash and equivalents (£30.2m) aren’t sufficient to cover its debt (£52.8m), and is something worth noting.

Having said that, I’m still not convinced of its growth prospects. Given the current macroeconomic environment, Dunelm isn’t going to expand its market share by a huge margin any time soon. Its focus for now has to be on maintaining its customer base and healthy margins.

On top of that, the latest price targets from JP Morgan and Barclays indicate that Dunelm shares have limited upside too, as both banks have a price target of £7.61. I’m a buy-and-hold investor, but with its current share price at £7.89, I’m planning to exit my position and take profits before further headwinds bring its share price lower. To conclude, I believe there are better stocks in more robust industries to invest my cash in for the long term.

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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. John Choong has positions in Dunelm Group. The Motley Fool UK has recommended Barclays. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Apple (NASDAQ: AAPL) is one of the world’s most traded stocks. Like many tech giants, it’s renowned for its ability to outperform the S&P 500 on almost every time horizon. So, how much would I have now if I’d invested £1,000 in Apple stock three years ago?

Big Apple

If I’d invested £1,000 back then, the stock would have generated a return of approximately 130% on my investment. To complement this, the Nasdaq-listed firm pays a dividend, which would increase my overall return by an additional $55.44, bringing the total return to around £2,800. This is what it would translate to in real income, inclusive of exchange rates, but excluding broker fees and capital gains tax.

Although the growth of Apple stock is approximately 130%, investing over three years ago would have grown my investment by more than two times. That’s because of the impact of a weak pound and strong dollar today. If I compare this to the performance of the US’s three main indexes, Apple stock still outperforms by quite a substantial margin, even excluding dividends.

Stock up on Apple?

The stock has been performing rather poorly this year. This is due to bear market conditions as a result of high inflation and rising interest rates, sparking fears of a recession.

But CEO Tim Cook will be reporting the firm’s Q4 results later this month. Here are its earnings estimates going into its Q4 earnings release. Beating earnings estimates and a decent outlook going into its next financial year could send its share price higher and recover some of its losses this year.

Taking a bite

Will I be buying Apple stock any time soon then? Well, for starters, the iPhone owner has an excellent history of producing excellent returns consistently. And it’s been able to grow its revenues and profit margins over the last decade. As a matter of fact, Warren Buffett is such a huge fan of the stock that it makes up 40% of Berkshire Hathaway‘s equity portfolio.

However, it’s worth pointing out that the firm’s balance sheet could do with some improvement. Its debt-to-equity ratio is considered to be relatively high, at over 200%. This is especially worrying when it has $127.5bn worth of debt to pay within the next year, with only $51.5bn worth of cash and $45.4bn worth of receivables due within a year.

Nonetheless, Apple stock has a market cap of $2.28trn, so raising cash through a small stock offering (leading to stock dilution) shouldn’t be too big an issue. Even so, I’m wary that the current recessionary backdrop could force Apple to dilute shareholders more than expected as consumer spending slows down.

Although past performance is no indicator of future returns, the company still has a lot going for it, and I don’t see Apple losing its place as the world’s number one brand for electronics soon. Even Morgan Stanley has labelled it a top stock pick in the event of a US recession. Therefore, with an average ‘strong buy’ rating and price target of $182, I’ll be using the current bear market as an opportunity to start sinking my teeth into Apple stock.

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John Choong has no position in any of the shares mentioned. The Motley Fool UK has recommended Apple. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Shares in the newly branded International Distributions Services (LSE: IDS) saw a big crash last week. With the stock already down more than 60% this year, could this present me with a buying opportunity? Or is this merely a value trap?

A Royal rebrand

When Royal Mail reported its first-quarter results in July, it opted to change its name to International Distributions Services. The reason for the rebrand was “to have clearer financial separation” between the group’s two businesses — Royal Mail and GLS. The former mainly operates in the UK, while the latter is known for its operations internationally.

Having said that, the change of name only came into effect earlier this month. In the week leading up to its rebrand, IDS shares rose as much as 12%. This was a head-scratcher as the logistics company didn’t release any news. So, why did the stock jump?

Well, one plausible reason could be the speculation about the potential break-up of the group’s two divisions. Since the end of the pandemic, Royal Mail’s revenue and profits have been on a steady decline, with GLS seeing contrasting fortunes. But given that the majority of the firm’s revenue comes from Royal Mail, IDS shares have since sunk as a result. As such, a spin-off like the one seen between GSK and Haleon could be possible.

Losses are stacking up

IDS shares took a tumble on Friday and are back down to the lows for this year. This occurred when the courier said it needed to cut more than 7% of its workforce. Along with that, the FTSE 250 firm now expects £219m of first-half losses. Moreover, it expects to lose up to a staggering £350m for its full year, and that’s without even taking a further 19 days of strikes into account.

Royal Mail claims that it’s already lost £70m from just three days’ worth of strikes by its staff. Hence, a further 19 days could prove even more damaging. And despite the stellar GLS performance so far this year, analysts don’t think the international segment’s strong enough to support IDS shares from falling further.

Shrinking volume

Nonetheless, there’s an argument to be made that IDS shares are trading at an extremely cheap price. After all, it has a price-to-earnings (P/E) ratio of just three. It’s also got an excellent dividend yield of 9%, which looks lucrative.

However, I should point out that these are lagging indicators as they’re based on the company’s previous earnings figures. Given its latest revised outlook, its price-to-earnings-growth (PEG) ratio is now forecasted to be negative. Consequently, I’m expecting its balance sheet to shrink, and its dividend to follow.

Overall, I think IDS shares are a value trap. The board’s efforts have been unsuccessful to date, with no plan in place to resolve its current disputes. Furthermore, the current recessionary backdrop isn’t going to help its parcel volumes in the short to medium term either.

Additionally, a number of brokers such as Peel Hunt and Deutsche recently downgraded their ratings for IDS shares to ‘sell’. Therefore, I’ll be steering clear of this stock as I expect there to be further downside, having taken its most recent developments into account.

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John Choong has no position in any of the shares mentioned. The Motley Fool UK has recommended GSK plc and Haleon plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Down 35% this year, Pinterest (NYSE: PINS) stock could see a further decline after disappointing news that saw US inflation come in above consensus at 8.2%. If so, could this drop be a buying opportunity?

Bursting the bubble

High inflation and rising interest rates have been the main culprits behind the decline of Pinterest stock. All three US indexes are in bear market territory as investors brace for a recession. Given the company’s position as a growth stock, its future cash flows are expected to be hampered as consumer spending decreases, hence the monumental drop in its stock price, from $86 to $21 over the last year.

Nonetheless, Pinterest has been equally responsible for the downfall of its own stock. Its failure to hold onto monthly active users (MAUs) and its slow rollout of new features caused investor sentiment to weaken over the past year. As a result, investment bankers and brokers alike have steadily reduced Pinterest’s price target.

Ready for a change

However, fortunes for the company began to change when new CEO Bill Ready entered the fray. With an abundance of e-commerce experience, he’s pioneered Google’s mobile pay system and was CEO at PayPal‘s Braintree and Venmo. His impressive CV positioned him as a strong candidate to lead Pinterest’s growth in the e-commerce space.

In addition to that, activist investor Elliott Management acquired a large position in the company. The fund is known for its ability to pressure companies into improving its margins and growth prospects. As such, investors and analysts took kindly to this news. Subsequently, this saw Pinterest stock lift itself from its all-time low of $17.19 to leap as high as $25.83, over the last three months.

Besides that, Pinterest has also seen an improvement in its business. The tech company has been able to continue growing its revenue, with average revenue per user (ARPU) also seeing healthy growth. The infamous decline of its MAUs also seem to be tapering off as management guided for a rebound in users going into H2. The introduction of its collage-making app, Shuffles, has sparked plenty of hype and could help its MAUs as well.

That being said, Pinterest will have to show an improvement to its bottom line. After a disappointing decrease in non-GAAP earnings in Q2, investors will be hoping for a turnaround. A continued drop in EPS is definitely a cause for concern as it could mean further downside for its stock price.

Solid platform

So, could this be an opportunity to increase my position in Pinterest stock? Well, the company’s balance sheet is flawless as it boasts a debt-to-equity ratio of 0%. For that reason, I’ve got no doubts that Pinterest would be able to ride out a potential recession with its cash and equivalents of $2.66bn.

Most importantly, the firm is still in innovation mode and is expected to continue its aggressive growth under Ready’s leadership, with plenty of features still not fully rolled out (Shuffles, seamless checkout, product tagging, and more).

Moreover, Goldman Sachs recently upgraded its rating for Pinterest from neutral to buy, with a price target of $31. Overall, it has an average ‘buy’ rating and a price target of $26.50. Therefore, I’ll be buying more Pinterest stock while it sits at its current levels.

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John Choong has positions in PayPal Holdings and Pinterest. The Motley Fool UK has recommended PayPal Holdings and Pinterest. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Airline shares haven’t had the best time this year, and easyJet (LSE: EZJ) has been no exception. Its shares are down over 50% and the company has got plenty of headwinds to deal with. Having said that, these factors may have already been priced in. Could now be a good time for me to buy its stock then?

Recovery isn’t easy

When easyJet released its latest trading update, its shares didn’t pop as expected. Its Q4 numbers were generally positive as the company flew 26.3m seats and operated at 88% of its pre-Covid levels. However, despite a strong performance, the airline still expects its full-year profit before tax to come in negative at -£183m.

From these figures, it’s easy to understand the lack of enthusiasm surrounding easyJet shares now. The budget airline still lags behind its pre-pandemic numbers by quite some distance, and a return to profitability still looks quite some way off.

No turbulence?

Nevertheless, there are a couple of things investors can cheer for. For one, easyJet expects to fly around 20m seats in Q1, which is a 30% increase on an annualised basis. More importantly, however, load factors are reported to be currently ahead of the same point in 2019, thus showing that the company is successfully battling through strong headwinds of a potential recession.

“Our 2023 summer season went on sale last week and we were filling the equivalent of more than four A320 aircraft a minute in the opening hours, demonstrating the continued demand.”

CEO Johan Lundgren

The second thing would be the company’s hedging strategy going into FY23, as it battles high fuel costs and a strong US dollar (USD). easyJet has increased its share in fuel and the greenback hedges, with around 56% and 62% hedged respectively. Moreover, the firm has been able to hedge these commodities at significantly better rates than the overall market.

Although these rates should allow easyJet to protect its bottom line, hedges are also a double-edged sword. That’s because a sudden decline in fuel prices and/or USD strength could further eat into the company’s profits. That being said, analysts are still expecting unhedged parts to impact the firm’s bottom line.

Up and away?

Taking everything into account, has the easyJet share price bottomed? Well, there’s no way of telling given the current geopolitical and economic climate. Even so, its outlook remains promising despite challenging times, as competitor IAG also released a bullish trading update yesterday.

Furthermore, easyJet’s balance sheet is well equipped to weather another slow down in travel demand. Management reported that the company finished its financial year with cash levels of around £3.6bn with net debt of approximately £0.7bn.

After all, Peel Hunt reiterated its ‘buy’ rating with a price target of £2.93 for the stock. What’s most lucrative, though, is the average price target among analysts, at £5.71. This means that I can almost double my money if I decide to invest at current levels, provided analysts get their estimates right.

Despite that, I’m not a fan of the company’s business model as it produces low profit margins. Hence, I won’t be investing in easyJet shares. I still think the company has plenty of potential and I wish them and their shareholders the very best.

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John Choong has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

International Consolidated Airlines (LSE: IAG) shares soared by as much as 10% yesterday. This comes on the back of a bullish update. Could this pop spark a rally and mark a turning point for the stock?

Higher than expected

In tandem with competitor easyJet, IAG released a solid statement, reassuring investors of its outlook. The airline only expects to report its complete set of figures in two weeks’ time. Nonetheless, sentiment from the board was generally positive. As such, it’s understandable why investors were optimistic about IAG shares.

“Trading during the third quarter has been better than expected due to passenger revenue strength. As a result, we now expect pre-exceptional operating profit for the third quarter to be in the region of €1.2bn. Forward bookings remain at expected levels for the time of year, with no indication of weakness, and accordingly our fourth quarter expectations remain unchanged as of today.”

CFO Nicholas Cadbury

Given the board’s previous outlook of achieving profitability by the end of the year, this wasn’t too much of a surprise. However, given the current macroeconomic climate, optimism surrounding IAG shares have been muted since its Q2 results.

Chilly winter

It isn’t clear skies for IAG just yet, though. The company still faces a number of headwinds in the short and medium term. Although Heathrow has agreed to lift its cap on passenger numbers, the bigger picture doesn’t look as rosy. While Europe’s busiest airport is expecting a busy Christmas period, it expects a cooldown in travel demand going into 2023.

Even though IAG’s Q3 and Q4 numbers are expected to come in hot, it worries me that the airline may not be able to maintain its momentum going into the new year. For that reason, I’m worried that any recovery in IAG shares could be short lived.

It’s also worth mentioning that given the current macroeconomic environment, it could be a matter of time before the slowdown in consumers’ discretionary spending catches up to IAG’s top line. A recession is being penned in for 2023 after all. Not to mention, travel to Asia still remains at low levels. Therefore, the outlook for next year remains uncertain.

Turbulent times ahead

So, do I think IAG shares are worth a position in my portfolio? Well, I’ve no doubt that it will continue its path to recovery. Having said that, I believe it’ll face a tough 2023 to maintain profitability while returning to pre-pandemic levels. This is also why analysts only predict a 30% upside to its current share price.

Management is going to have to find the right balance between growth and margins during a cost-of-living crisis. And they’ll have to do this while keeping the company’s debt in mind. IAG still has an abundance of debt to repay, and the longer it puts it off, the more it’s going to cost the firm.

It’ll be interesting to see what the board’s outlook is when IAG announces its full results at the end of the month, nonetheless. Along with this, I’m keen to see how much fuel it’s hedged, and at what price. This could ultimately impact its bottom line moving forward. But for now, I won’t be buying IAG shares.

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John Choong has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.