Pinterest (NYSE:PINS) achieved fantastic revenue growth in Q4, up 76% over the prior-year quarter. This was even faster than the amazingly high 58% revenue growth that Pinterest achieved in Q3 2020. But the problem is PINS stock is now up so high that its valuation is at full measure.
By the way, that does not mean that the stock won’t continue to rise. So far this year it is up 25% as of Feb. 24, and up 13% in the past month. Investors who have held PINS stock over the past six months have had a stellar 147% spike in their investment. During much of that time PINS stock was at a fair value just as it is today. I have been writing about this each time it spikes.
In other words, there is nothing preventing an overvalued stock from getting more overvalued. Especially if the company continues to pull off stellar results like it just did.
What Pinterest Is Worth
One of the most interesting points about Pinterest’s recent earnings release was the increase in its cash flow margins. For example, its revenue was $705.6 million in Q4 but it made an astounding $299.1 million in adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization). This works out to an amazing margin of 42%.
This is a very high margin and makes the company more valuable to investors. For example, even last quarter when revenue rose 58%, its EBITDA margin was 21%. In other words, even though revenue growth accelerated from 58% to 72% in Q4, its margins doubled (up 100%).
However, and this is a little hard to believe, this still means that Pinterest stock is at fair value, and likely overvalued. This is because the stock now has a market capitalization of $54 billion.
For example, let’s project out its revenue and EBITDA growth for a few years. Analysts now project that revenue in 2022 will hit $3.39 billion. If the company makes a 42% adjusted EBITDA by that time, it will be $1.42 billion.
But the problem is that the enterprise value (EV)-to adj. EBITDA ratio is still very high. As Pinterest has $1.7 billion in net cash and securities. That means that its EV is $52.35 billion ($54.05 billion minus $1.7 in cash) and the EV-to-EBITDA ratio is 36.7 times (i.e., $52.35 billion divided by 1.42 billion adj. EBITDA).
A multiple of 37 times adj. EBITDA two years out in the future is simply way too high to be considered anything other than fair value. Moreover, even if I project out two more years, I can’t derive a multiple of less than 20 times EV-to-adj. EBITDA.
What to Do With PINS Stock
To a strategic buyer, it doesn’t matter much whether they pay full value or even slightly more than that for a valuable company like this. For example, the Financial Times reported on Feb. 11 that Microsoft (NASDAQ:MSFT) had made a takeover offer approach to Pinterest.
Pinterest turned Microsoft down because it wanted to stay independent. But the offer shows that Pinterest has something that a large strategic buyer wants. The FT article implies that Microsoft wanted to acquire Pinterest in order to move its cloud-based system over to its Azure platform away from Amazon (NASDAQ:AMZN) and its AWS cloud servers.
In other words, 36 times EV-to-EBITDA is not high for a strategic buyer. There could be other large potential acquirers out there as well. But, of course, no sane investor should ever count on this.
Analysts tend to agree with me on the PINS stock valuation. For example, TipRanks.com says that the average price target of 23 analysts is $90.83, or just 5.74% above today’s price. Marketbeat.com says its survey of 31 analysts results in an average price target of $75.85, or 11.7% below today’s price. Other sites say $90.69 (Seeking Alpha), and $91.40 (Yahoo! Finance – Refinitiv).
In other words, nobody believes that there is much upside left in the stock. That and $2.50 might buy you a cup of coffee, as far as I am concerned. Typically analysts can be quite far off on the direction of a stock, even though they understand how it makes money. But in this case, I tend to agree with them. PINS stock is clearly at fair value if not overvalued.
On the date of publication, Mark R. Hake does not hold a long or short position in any stock or security mentioned in this article.