Pinterest (NYSE:PINS) stock has really had a rough half-year. Since it peaked on Jul. 6 at $80.29, PINS stock has slowly drifted down. By the end of 2021, it closed at $36.35. That is a drop of $43.94 in about six months and represents a 54.7% decline during that period. That’s a bummer.
Moreover, for the full year 2021, the stock did not do very well. For example, at the end of 2020, it was at $65.90. So PINS stock lost money during 2021. It was down $29.55 or negative 44.84% for the year. That is lousy.
Nevertheless, there is good reason to believe that 2022 will bring much better results. That will very likely bring a turnaround in PINS stock for investors at this trough point.
Where Things Stand for PINS Stock
For one, the third-quarter results, which came out on Nov. 4, showed that the company made positive free cash flow (FCF) at a high rate for the quarter.
Pinterest is rare for a large profitable market cap stock ($22.6 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 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 is a very high number, especially since last year the company had a negative FCF of -$85.9 million.
In other words, despite the action in the stock this year, the company has turned super profitable from an FCF standpoint this year. That is especially the case from a margin standpoint.
Look at Pinterest’s FCF margins. Pinterest is also extremely profitable. For example, since the 9-month revenue was $1.731 billion, its $535.7 million in FCF represents 30.9% of that revenue. That is almost one-third of sales going straight to the bottom line from a cash standpoint. That is very impressive.
So why has the stock been performing so badly?
Looking at Pinterest’s Value
There can be a lot of reasons for the poor performance. Maybe the company did not meet growth expectations, or maybe its guidance is not that great. I have learned over the years to disregard all the white noise from Wall Street and try and focus on the fundamentals.
Here is where I think things stand. The company is likely to make significantly more revenue this year. Given its huge FCF margins, we can derive a value for PINS that is significantly higher.
For example, as it stands, there are 27 analysts surveyed by Seeking Alpha who estimate that sales will rise to $3.24 billion this year. That represents a 26.5% rise from the $2.56 billion in sales forecast for 2021.
Therefore, if we apply a 30% margin to $3.24 billion in forecast sales for 2022, we get a FCF estimate of almost $1 billion (i.e., $972 million).
Given this estimate, there is simply no way that Pinterest will stay at a market cap of $22.6 billion. That means that FCF represents about 4.3% of the market cap.
A more appropriate minimum FCF yield would be 3%. So, if we divide $971 million in forecast FCF for 2022 by 3%, we get a market cap estimate of $32.366 billion.
That represents a minimum potential gain of 31% over today’s market value of $24.71 billion.
What to do With PINS Stock
This implies that PINS stock has a minimum target value that is 31% over today’s price of $36.41 per share. That puts its value at $47.70 per share (i.e., 1.31 x $36.41).
And don’t forget, I think the FCF margin could end up being even higher. Moreover, the 3% FCF yield metric is very conservative. The market could easily end up giving it a 2% FCF yield or better (i.e., 1.5%). Both of these scenarios would significantly push up PINS stock.
In other words, over the long term, the fundamentals of the business will be adequately valued by the market. The fact that Pinterest is now making huge 30% FCF margins is not adequately “in” the price now. Look for the market to push PINS stock up at least 31% over the next 12 months.
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 runs the Total Yield Value Guide which you can review here.
