Look for Strong Ad Sales and Free Cash Flow from Pinterest in Q3
Pinterest (NYSE:PINS) has fallen a good deal since my last article and indeed seems to be at a low for the year. This is probably not justified, especially since its upcoming third-quarter earnings release will likely show positive free cash flow (FCF) as in Q1 and Q2. As a result, I expect to see PINS stock rebound from current lows.
In fact, the stock — at $45.61 as of the close of Oct. 28 — is down over 30% year-to-date (YTD). This is after it reached a peak close of $89.15 on Feb. 15 as well as a more recent peak close of $62.68 on Oct. 20.
Moving forward, I suspect the next earnings release to act as a catalyst for this stock. In my last article, I wrote that, based on its FCF production, PINS was likely worth $81.15 per share. That now represents potential upside of 78% from Oct. 28.
Where Things Stand for Pinterest
Last month, I wrote that Pinterest produced a lower FCF margin in Q2 (16.7%) than in Q1 (55.5%). However, over the first six months, the average FCF margin was 36.1%.
I used that to estimate the average annual FCF for the year going forward. In fact, I applied it to analyst estimates for 2022 forecast revenue. This resulted in an estimate of $897 million in FCF for 2022.
Next, I applied a 1.75% FCF yield metric to derive a potential market capitalization of $52.3 billion. This then resulted in my price target of $81.15 per share.
However, since then, several things have happened. Although analysts have lowered their 2022 revenue estimate slightly, there is another development with some of the company’s peers which allows for more confidence.
For example, Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) just reported very robust advertising revenue and earnings for Q3. Typically, more than 81% of its revenue comes from advertising. The company’s ad sales were up 43.2% to $53.13 billion, an increase from $37 billion a year ago. In addition, total sales were up about 41% overall.
This has huge implications for Pinterest, since most of its revenue comes from ad sales as well. The company is heavily reliant on growth in ad sales to power its free cash flow.
Therefore, one can assume that, because Google had a good quarter in terms of ad sales, Pinterest will have similarly benefited. According to Yahoo! Finance, analysts now estimate that Q3 revenue will hit $631.2 million, up nearly 42.6% year-over-year (YOY) from $442.6 million. This is close to the 43% gain in ad sales at Google. That should give PINS stock investors a lot of confidence in the forecasts.
As a result, analysts will also be looking to see if Pinterest’s FCF margin will be close to the average 36% rate that the company produced in the first half of the year. In fact, in the last 12 months, FCF margin is probably even more important given that much of the company’s FCF comes in during Q4.
What to Do with PINS Stock
For right now, I am going to stick with my original $81.15 price target for PINS stock. However, I will likely have to adjust this once the Nov. 4 earnings come out, based on how well the company’s revenue and FCF production do.
Nevertheless, it seems pretty clear that PINS stock is at too low of a price here. I suspect that, once its earnings are released, the shares will begin moving up again.
This is based on confidence in the ad sector, given Google’s sales numbers. It’s also based on the underlying value of PINS stock, as I have pointed out before.
On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) in any of 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 runs the Total Yield Value Guide which you can review here.
