Pinterest (NYSE:PINS) can’t stop falling. At some point, PINS stock has to start to reflect the great underlying fundamentals of its free cash flow (FCF). I wrote about this earlier when I pointed out that the company generated a good deal of FCF. If the upcoming fourth-quarter results confirm this, expect to see a turnaround in PINS stock.
Meanwhile, the stock has been slowly drifting down. By the end of 2021, it closed at $36.35. But since then PINS stock has tumbled to $26.84 as of today, Jan. 31. That represents a drop of 23.30% year-to-date (YTD). That is a bummer.
Moreover, this is after Pinterest reached an interim peak of $62.68 Q3 (Oct. 20, 2021) and also $80.29 in Q2 (July 6). Therefore, since its Q3 peak, PINS stock is down 57.2%, and from the Q2 peak — it’s off by over two-thirds (-66.6%).
Based on its FCF performance and also analysts’ forecasts, this drastic decline simply does not make much sense. In short, I suspect that the market has overdone the sell-off. The stock is likely to post a major turnaround if the Q4 numbers look even moderately OK.
Where Things Stand With Pinterest
The third-quarter results, which came out on Nov. 4, showed that Pinterest made $535.8 million in positive free cash flow (FCF) at a high rate for 9 months ending Sept. 30.
Pinterest is rare for a large profitable market capitalization stock ($18.2 billion) in that it does not report the FCF figure. We have to calculate it ourselves. However, that is not very hard to do.
For example, on page 13 of its shareholder’s letter, the company’s Cash Flow statement shows that cash flow from operations (CFFO) for the last 9 months was $541.1 million. After deducting $5.3 million in capital expenditures, the FCF figure was $535.8 million.
This represents a very percentage of its sales, i.e., its FCF margin. For example, sales for the 9 months were $1.731 billion. As a result, the $535.8 million in FCF represents 30.95% of its 9-month sales.
In addition, Seeking Alpha shows that the CFFO for Q3 was $165.7 million. After deducting $1.9 million in capex spending, Pinterest’s Q3 FCF was $163.8 million. That represents 25.9% (almost 26%) of its quarterly revenue of $632.9 million. In other words, its FCF margins are still very high.
This is no reason why the stock should have cratered so much. Moreover, we can use this to estimate its value.
What PINS Stock Is Worth
If we assume that going forward Pinterest will make 26% FCF margins, all we have to do is estimate its sales and apply the margin to come up with FCF.
For example, this year analysts forecast $3.22 billion in sales, which will be 25.8% higher than estimates for 2021 revenue ($2.56 billion), according to Seeking Alpha’s analyst survey.
Moreover, by mid-year analysts will start focusing on next year’s sales. Right now the earliest estimates are for $4.089 billion, or 59.7% higher than the 2021 forecast revenue.
So, by the end of 2023, FCF could rise to over $1 billion (i.e., 26% x $4.089b = $1.063b). Since this is two years in the future, we can bring this back to the present using a 10% discount rate over 2 years. That works out to 82.64% of $1.063 billion, or $878.5 million in present value FCF.
Therefore, using a 3% FCF yield metric, the value of PINS stock is $29.283 billion. Compare this to its market value today — $17.53 billion, according to Seeking Alpha. That implies that the stock is worth 67% more than today, or $44.82 per share.
What To Do
It may take longer than one year for the stock to rebound to this level. However, I suspect that once the market understands how extremely Pinterest is that won’t be the case.
But even if it takes say 1.5 years for PINS stock to rise 67% to $44.82, this implies that its average annual gain will be 40.76% each year. This conservatively implies that PINS stock could rise 41% this year to $37.78 per share. Patient value investors will be happy to wait for this to occur once the market understands the company’s underlying fundamental value.
On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and Newsbreak.com and runs the Total Yield Value Guide which you can review here.
