Pinterest (NYSE:PINS) stock is well off of its highs earlier in the year. Now it is looking like a bargain, especially given the amazing performance it had in the first quarter of 2021. Based on my assessment, PINS stock could be worth 25% more at $79.95 per share. This is based on its powerful free cash flow (FCF). This article will describe how I came up with this valuation.
On April 27, Pinterest released its earnings for Q1 and reported that its adjusted EBITDA (earnings before interest, taxes, depreciation, or amortization) was $84 million, 17.3% of its Q1 revenue.
However, what interests me is that its 10-Q filing shows that the company produced an astounding amount of free cash flow (FCF). On page 12 of the 10-Q, Pinterest reported that its cash flow from operations (CFFO) was $270.579 million. After deducting $1.251 million in capex spending, the FCF is $269.3 million.
This is astounding since that represents 55.5% of its $485.2 million in Q1 revenue. That is an extremely high number. This reminds me of what happened in 2020 Q4. I wrote about that in my last article on Pinterest on Feb. 24. Then it was the fact that adjusted EBITDA came in at 42% of the revenue during Q4. But then it fell just to a 17% adj. EBITDA margin in Q1. So what is going on here?
Using Margin to Estimate Pinterest’s FCF
After looking more carefully at the free cash flow number for Q1, it can be seen that much of the cash generation in Q1 was due to changes in working capital. This essentially boils down to a one-time cause for the huge Q1 FCF margin.
The way to get around this is to look at the last 12 months (LTM) free cash flow (FCF). That is what Amazon (NASDAQ:AMZN) does in its quarterly financial reporting. It reports its operating and FCF looking back 12 months to iron out the changes in working capital that can make one particular quarter’s results too high.
Let’s do this with Pinterest. Seeking Alpha has a tab showing that the trailing 12 months (TTM) CFFO for Pinterest was $242. 1 million as of March 31. After deducting $11.6 million in capex spending the FCF was $230.5 million. This works out to 12% of its TTM $1,905 million in revenue as of Q1.
For example, we can use that number to estimate FCF going forward. Given that its quarterly FCF margin was 55.5% and its LTM margin was 12%, we can safely estimate that about 20% of future revenue will turn into FCF.
Therefore, applying this to 2022 estimates results in a projection of $692 million in FCF. That is because analysts covered by Seeking Alpha estimate that 2022 revenue will reach $3.46 billion. So 20% of $3.46 billion results in $692 million in FCF.
Estimating PINS Stock Value Using FCF Yield
Here is how we can use this FCF estimate to derive a value for PINS stock. First let’s assume that in one year the stock will have an FCF yield of between 1% and 2%. This is typically where a high FCF stock like PINS will trade. Therefore, we can use this to estimate the stock’s value.
If we divide the 2022 FCF estimate of $692 million by 2%, the resulting value is $34.6 billion. Using a 1% FCF yield, the resulting valuation is $69.2 billion (i.e., $692 m / 0.01 = $69.2 b).
So the midpoint of these two valuations is $51.9 billion. Today, Pinterest has a market value of about $41.59 billion. This means that PINS stock is worth 24.79% more than today. Given that its price as of June 2 was $64.07 per share, it implies that PINS stock is now worth 25% more at $79.95 per share.
Therefore, sometime in the next year PINS stock is likely to move significantly higher as a value stock. This assumes its FCF margins will average 20% over the next year. Look out if they come in even higher than that as they did in Q1. The stock could spike even higher.
On the date of publication, Mark R. Hake did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.