A first look at Pinterest

One of my astute friends noticed a similarity in recent purchases by some of the big money managers...

If you've been following along with me recently, you'll remember that I shared 96 13-F filings from some of the largest, best-known money managers in my November 15 and November 18 e-mails.

Institutional investment managers with at least $100 million in assets under management have to file a 13-F every quarter that discloses their equity holdings.

And as I said in last Wednesday's e-mail, my friend Paul S. flagged Pinterest (PINS) as one of the stocks purchased by more than one asset manager during the quarter. As he wrote:

I think Pinterest [is]... interesting because of its improving financials. The main question I'm investigating is whether the company has a defensible "moat."

Paul's comment piqued my interest – so I took a quick initial look at the stock. As I said on Wednesday...

Pinterest is a visual search engine/online scrapbook application that helps consumers find ideas, get inspired, and develop, curate, and hone their tastes.

I took a quick look at the stock and can see that, after getting caught up in the meme-stock bubble, it's now back to where it was when it went public four and a half years ago:

Paul is correct that Pinterest's financials are improving, and the company just turned profitable... so I'm going to add it to my list of stocks to take a deeper look at.

So today, let's examine Pinterest's financials to see whether this stock idea is worth pursuing further...

I'll start with the below chart of revenue and net income.

As you can see, Pinterest has grown its revenues more than 600% since 2017 while basically breaking even on a GAAP ("generally accepted accounting principles") basis, which is very impressive (the loss in 2019 was a noncash charge for stock-based compensation related to the IPO):

Last quarter, Pinterest's revenue grew a solid 18% thanks to 11% user growth and a 5% increase in average revenue per user.

Next, let's turn to cash from operations, capital expenditures ("capex"), and free cash flow ("FCF") in the next chart. The company's FCF exploded in 2021 due to the pandemic as everyone sat at home, online... fell as the world reopened in 2022... and has doubled since then – again, very impressive:

So, what has Pinterest done with all that cash flow? Two things...

First, the company piled up cash – as you can see, net cash (the company has no debt, but has $154 million in long-term leases) has risen from around $500 million in 2017 to about $2.3 billion today:

Second, Pinterest has sporadically bought back shares (note that this chart shows quarterly data instead of annual data):

However, the repurchases haven't made a dent in the share count... because this has been offset by stock options that Pinterest (like nearly all tech companies) gives to employees – but at least shareholders aren't being diluted:

Finally, let's look at valuation.

As of Friday's close at $30.02 per share, the company has a market capitalization of about $20.3 billion. Netting out the roughly $2.3 billion in cash means the enterprise value is $18 billion. That's equal to 5.2 times trailing revenue of $3.5 billion.

On an adjusted earnings basis, excluding noncash charges (mostly stock-based compensation), analysts expect Pinterest to earn $1.52 per share this year and $1.81 next year... so the stock is trading at 19.8 times this year's estimates and 16.2 times next year's.

I wouldn't say those multiples are cheap, but they're reasonable.

So based on what I've seen so far, Pinterest is worth a deeper dive...

It has extremely attractive economic characteristics: nice growth, almost no capex, strong FCF, and an excellent balance sheet. And the valuation doesn't scare me away, as the stock lost a third of its value in the past five months.

So, stay tuned!

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.