With a 36% Free Cash Flow Margin, Consider Averaging Into Pinterest

  • Pinterest (PINS) is down 21.5% from its recent peak on April 4, but it’s possible PINS stock could fall further.
  • Its monthly active users fell last quarter as did its EBITDA cash flow, although free cash flow was higher.
  • This could lead to problems next year, but investors may have an opportunity to average in here.
Smart phone with the Pinterest logo in front of blurred out pinterest post pictures

Source: DANIEL CONSTANTE / Shutterstock

Pinterest (NYSE:PINS) produced 18% higher revenue year-over-year (YOY) in its recent first-quarter earnings. But the bad news is that its global monthly active users (MAUs) fell 9% YOY to 432.9 million by April 25. With a lower advertising user base, its revenue could decline over the near term. Nevertheless, it is possible PINS stock could be worth averaging into.

PINS Pinterest $21.89

What Happened in Q1 for PINS Stock

Pinterest’s costs could keep rising. For example, its GAAP net loss was $5 million for Q1. In addition, its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) was down 8% to $77 million for Q1. EBITDA is a rough form of cash flow used to measure how much cash the company generates before debt service obligations.

A more accurate measure of cash is free cash flow (FCF). This can be seen on page nine of its earnings release. It shows that in Q1, the company produced $213.3 million in cash flow from operations (CFFO). Next, after deducting capital expenditures of $6.9 million in Q1, its FCF worked out to $206.4 million. That is a far cry from the EBITDA figure of just $77 million.

In other words, the company is more profitable on a cash flow basis than just the slimmed-down EBITDA cash flow measure. EBITDA does not include some items that are included in FCF, like changes in working capital, interest income and expenses, taxes and capital expenditures. So, FCF is a fuller measure of cash flow, and at PINS stock it is higher than EBITDA.

Why This Matters for Investors in Pinterest

This is important, since the company’s FCF margin can be used to value PINS stock. Based on that figure, we can see if PINS stock looks undervalued.

For example, take a look at Pinterest’s present FCF margin. For example, revenue in Q1 was $574.9 million and its FCF was $206.4 million. This means its FCF margin in Q1 was very high at 35.9%.

Since analysts forecast revenue will rise to $3.06 billion this year rom $2.58 billion in 2021, we can apply this 35.9% margin to estimate $1.1 billion in FCF for 2022. Moreover, by 2023, revenue is forecast to jump 23% to $3.77 billion. That implies FCF could rise to $1.353 billion.

The bottom line is that PINS stock could be worth at least $22 billion using a 5% FCF yield and $1.1 billion in FCF for 2022. This is 54% higher than its present market capitalization of $14.26 billion.

It also means PINS stock could be worth 54% more than its May 16 price of $21.49 per share. That gives it a price target of $33.09 per share.

What to Do With PINS Stock

Given that the company is so cash flow profitable, this might be an opportunity to average into PINS stock. If it keeps falling, the company might be a good value play assuming it stays FCF profitable. It depends on the extraordinarily huge FCF margins of almost 36%.

For example, Seeking Alpha shows its FCF in the last 12 months (LTM) was $681 million. Since this was generated from $2.668 billion in revenue, its FCF margin in the LTM was 25.5%.

If we use this lower FCF margin to value PINS stock based on this year’s $1.1 billion revenue forecast, the FCF will be $280 million. Using a 5% FCF yield puts its value at $5.6 billion. That is below its present market cap of $14.26 billion.

With this, you can see how important its FCF margin will be for PINS stock valuation. This puts its range between $5.6 billion and $22 billion, or $13.8 billion on average. That is still below its present $14.3 billion market cap.

This makes it clear the stock might be a bargain depending on its FCF margin this year. The bottom line is that PINS stock could be worth averaging into now, assuming its free cash flow stays strong.

On the date of publication, Mark Hake did not hold (either directly or indirectly) any positions 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, Newsbreak.com and Beehiiv.com.

Article printed from InvestorPlace Media, https://investorplace.com/2022/05/with-a-36-free-cash-flow-margin-consider-averaging-into-pins-stock/.

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