With a free cash flow margin of 36%, consider averaging on Pinterest

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  • pinterest (PINS) is down 21.5% from its recent high on April 4, but it is possible that PINS stock may 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 could have the opportunity to average here.

Source: DANIEL CONSTANT / Shutterstock

pinterest (NYSE:PINS) generated 18% more revenue year-over-year (YOY) in its recent first quarter results. But the bad news is that its global monthly active users (MAUs) fell 9% year-on-year to 432.9 million as of April 25. With a weaker advertising user base, its revenue could decline in the short term. Nevertheless, it is possible that the stock of PINS is worth averaging.

What happened in the first quarter for the PINS stock?

Pinterest’s costs may continue to rise. For example, its GAAP net loss was $5 million for the first quarter. In addition, its adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) decreased by 8% to $77 million in the first quarter. EBITDA is an approximate form of cash flow used to measure the amount of cash generated by the business before debt service obligations.

A more accurate measure of cash is free cash flow (FCF). This can be seen on page nine of his earnings post. It shows that in the first quarter, the company produced $213.3 million in cash flow from operations (CFFO). Then, after deducting capital expenditures of $6.9 million in the first quarter, its FCF was $206.4 million. That’s 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 lean measure of EBITDA cash flow. EBITDA does not include certain items included in FCF, such as changes in working capital, interest income and expense, taxes and capital expenditures. Thus, FCF is a more comprehensive measure of cash flow, and for PINS shares it is higher than EBITDA.

Why It Matters to Pinterest Investors

This is important because the company’s FCF margin can be used to value PINS inventory. Based on this number, we can see if the PINS stock looks undervalued.

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

Given that analysts expect revenue to grow to $3.06 billion this year from $2.58 billion in 2021, we can apply that 35.9% margin to estimate $1.1 billion in FCF for 2022. Additionally, by 2023, revenue is expected to jump 23% to $3.77 billion. This implies that the FCF could reach $1.353 billion.

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

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

What to do with PINS actions

Since the company is so profitable in terms of cash flow, this could be an opportunity to average PINS stocks. If it continues to fall, the company could be a good value play assuming it remains profitable in FCF. It depends on the extraordinarily huge FCF margins of almost 36%.

For example, Seeking Alpha shows that its FCF over the last 12 months (LTM) was $681 million. As it 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 the PINS stock based on this year’s revenue forecast of $1.1 billion, the FCF will be $280 million. Using a 5% FCF yield puts its value at $5.6 billion. That’s below its current market cap of $14.26 billion.

With this, you can see how important its FCF margin will be for the valuation of PINS shares. That puts its range between $5.6 billion and $22 billion, or $13.8 billion on average. That’s still below its current market cap of $14.3 billion.

This clearly shows that the stock could be a bargain based on its FCF margin this year. The bottom line is that PINS stock might be worth averaging now, assuming its free cash flow remains strong.

As of the date of publication, Mark Hake did not hold (either directly or indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com publishing guidelines.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.