pinterest (NYSE: PINS) was one of the unintended beneficiaries of the outbreak of the pandemic. People were instantly spending more time at home, leading to an increase in demand for home entertainment options. The company saw another tailwind as people took on DIY and kitchen projects more often, and took to Pinterest for inspiration.
That said, the economic reopening is reversing these trends and Pinterest is suffering. The company has lost monthly active users for three straight quarters, and its stock is down considerably from its all-time high. The sale allowed Pinterest to trade at a premium, according to the following metric.
Pinterest’s Price to Free Cash Flow Ratio Suggests It’s Cheap
Pinterest trades at a price-to-free cash flow ratio of 23. That’s the lowest it’s sold for in its young history as a free cash flow-positive public company. Compare Pinterest to its social media peers Twitter, Breakand Metaplatformsonly Meta sells for a lower price to free cash flow ratio (see chart below).
Admittedly, there are reasons for Pinterest’s low valuation. For one, the company lost monthly active users for three consecutive quarters, totaling 45 million. Pinterest now has 431 million monthly active users, down from its peak of 478 million. Continued losses are an additional risk for investors who don’t know how high these numbers will go.
Note that, like its peers, Pinterest is free to join and use. It earns money by showing advertisements to users browsing the platform and app. Therefore, active users are essential to its success. Moreover, increasing the engagement of existing users is another crucial factor in its success. In this regard, there is another reason that could justify the decreasing evaluation of Pinterest: the management noted that Pinterest loses time on the competition. Short-form video site TikTok is gaining popularity with younger consumers and moving away from Pinterest.
In response to an analyst’s question about how Pinterest plans to reverse user losses, CFO Todd Morgenfeld said, “I think the short answer to your question is that we’re investing in our video content. short, our creator-driven content, our native content ecosystem to address exactly that point. And we believe that’s the path to enriching the user experience and connecting with shopping experiences at the over time, which will lead to frequency of use, more people on the platform and over time, a connection to purchases and commercial activity which will differentiate the platform, both vis-à-vis users than advertisers.”
Cheapness doesn’t necessarily make Pinterest stock a buy
Just because Pinterest shares are selling at a low price to free cash flow ratio doesn’t mean the stock is necessarily a buy. However, looking at Pinterest as a whole makes the case more compelling. Pinterest grew its revenue from $473 million in 2017 to $2.6 billion in 2021. This rapid revenue growth scaled the business enough to earn $316.4 million in net income in 2021.
Still, it may be best for investors to wait for Pinterest to show it can stop user losses and reverse that trend before starting a position. Of course, you may have to pay a higher price then, but it will be worth it to eliminate a significant risk.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.