Pinterest (NYSE:PINS) produced stellar fourth quarter and 2021 full-year results on Feb. 3. It shows that the company is now producing large amounts of free cash flow (FCF). As I wrote in January, I expect that PINS stock will start to reflect this reality fairly soon. To put it simply, Pinterest is gushing cash.
Apparently, the market hasn’t figured this quite out lately. In the last four and a half months since PINS stock peaked at $62.68, it has tumbled 30% year-to-date to $25.23 per share. Moreover, since the end of 2021, the stock is down $10.19 from $36.35, or negative 28%.
This kind of performance is typical of a company that might be losing a lot of money, or going out of business. Most likely it shows that the market has been re-rating the valuation metrics. But not to worry, Pinterest is making good money and producing huge amounts of FCF.
Pinterest’s Financial Performance
In 2021 Pinterest produced GAAP net income of $316 million. But its adjusted non-GAAP net income was $778.5 million. That works out to about $1.125 per share on a fully diluted basis.
So at $25.23, PINS stock looks reasonably cheap at just 23 times forward price-to-earnings. But what is even more important is that the company is now producing large amounts of free cash flow.
For example, based on its full-year cash flow statement, Pinterest made $752.9 million in operating cash flow. And after adjusting $9 million in capex spending, the FCF for the year was $743.9 million. This works out to 28.9% of its $2.578 billion in revenue for the year. That is a very high margin.
It is also useful for us when estimating the company’s project FCF for next year. For example, Seeking Alpha has a survey of analysts whose average survey of revenue for 2022 is $3.13 billion, and $3.96 billion for 2023.
So by 2023, FCF should be about $1.148 billion (i.e., 29% x $3.96 billion). That is 54% over the FCF produced in 2021. That works out to a compound rate of return of 24.2% over the next two years annually.
We can also use that to estimate the value of PINS stock going forward.
What PINS Stock Is Worth
PINS stock is now trading for about 4.3 times 2023 projected revenue and 17.8 times forward earnings, according to Seeking Alpha. However, applying a 5% FCF yield metric, essentially the same as multiplying by 20 times, results in a market valuation of $23 billion. For example, 20 x $1.148 billion equals $22.96 billion.
This $23 billion target valuation at 20 times FCF is over one-third higher than its market value today of $17.3 billion, according to Yahoo! Finance. That implies that PINS stock is worth $33.73 (i.e., 1.337 x $25.23 price today).
This is a very good potential return for most investors. For example, even if it takes two years for the stock to reach this level, the average annual return will be 15.62% annually for each of the next two years on average.
Here is the proof of this: if you start at today’s price of $25.23 and compound it by 15.62% for two years, the answer is $33.73 (i.e. 1.3368 x $25.23 = $33.73).
What To Do
The bottom line is that PINS stock has gotten pummeled too much, given how much free cash flow the company is producing.
Analysts tend to agree with me. For example, the average price target of 33 analysts surveyed by Seeking Alpha in the last 90 days is $42.41 per share. That is even higher than my $33.73 price target.
Moreover, TipRanks.com shows that the average price target of 24 analysts is $39.64 per share or 53% over today’s price.
We could also project out a higher price target if we used a lower FCF yield. For example, at a 4% FCF yield, equivalent to 25 times FCF, the target market value for Pinterest would be $28.7 billion (i.e., 25 x $1.148 billion). That is 66.9% higher than today’s $17.3 billion market capitalization and implies a price target of $43.44.
So you can see that once the market starts to re-appreciate the company’s ability to produce free cash flow, its price could rise between 34% and 67% very quickly.
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.