Stock Analysis

Pinterest, Inc. (NYSE:PINS) Might be Slightly Undervalued (Even Before Improving Its Monetization)

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NYSE:PINS
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After posting positive Q2 results, Pinterest, Inc. (NYSE: PINS) got hit with a 17% decline, as anxiety loomed over the global monthly active user numbers.

Since then, the stock remains under the key level of US$60, with the price action looking increasingly bearish. This article will examine the latest developments and the intrinsic value of the company through the discounted cash flow (DCF) model.

The company reported that the number of global monthly active users rose just 9% to 454M, vs. an expected 484.M, with a 5% decline in the U.S. (91M vs. 96.1M).

The broad market obviously didn't like that news, with J.P Morgan downgrading the stock to Neutral from Overweight and reducing the price target to $68. Other notable price target cuts include Piper Sandler, KeyBanc, and Evercore ISI.

Price dip didn't dishearten some institutional investors with ARK Investment Management added almost 152k shares.

NYSE: PINS Influence on Purchasing Behavior; Source - SocialMediaToday

Pinterest advocates see this as a temporary setback, quoting that the platform is much more successful in brand promotion than its peers like Facebook, Snapchat, or Twitter, as pins directly influence purchasing decisions to a tune of 90%. However, the critics make a valid point as there is a lot of work before the current monetization reaches comparable levels to the above-mentioned competitors.

See our latest analysis for Pinterest

A take on the Intrinsic Value

We generally believe that a company's value is the present value of all cash it will generate in the future. However, a Discounted Cash Flow (DCF) is just one valuation metric among many, and it is not without flaws.

For those keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

Crunching the numbers

We are going to use a two-stage DCF model, which takes into account two stages of growth.

The first stage is generally a higher growth period, heading towards the terminal value, captured in the second "steady growth" period.

To begin with, we have to get estimates of the next ten years of cash flows. Where possible, we use analyst estimates, but when these aren't available, we extrapolate the previous free cash flow (FCF) from the last estimate or reported value.

We assume companies with shrinking free cash flow will slow their rate of shrinkage and that companies with growing free cash flow will see their growth rate slow over this period. We do this to reflect that growth tends to slow more in the early years than in later years.

Generally, we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) estimate

2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
Levered FCF ($, Millions) US$753.8m US$1.15b US$1.47b US$1.75b US$1.95b US$2.12b US$2.26b US$2.38b US$2.48b US$2.57b
Growth Rate Estimate Source Analyst x8 Analyst x7 Analyst x4 Analyst x3 Est @ 11.57% Est @ 8.69% Est @ 6.68% Est @ 5.28% Est @ 4.29% Est @ 3.6%
Present Value ($, Millions) Discounted @ 7.0% US$704 US$1k US$1.2k US$1.3k US$1.4k US$1.4k US$1.4k US$1.4k US$1.3k US$1.3k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$12b

The second stage is also known as Terminal Value; this is the business's cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.0%. We discount the terminal cash flows to today's value at the cost of equity of 7.0%.

Terminal Value (TV)= FCF2031 × (1 + g) ÷ (r - g) = US$2.6b× (1 + 2.0%) ÷ (7.0% - 2.0%) = US$52b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$52b÷ ( 1 + 7.0%)10= US$26b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$39b. In the final step, we divide the equity value by the number of shares outstanding.

Compared to the current share price of US$57.0, the company appears about fair value at a 5.6% discount to where the stock price trades currently. Remember, though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

dcf
NYSE: PINS Discounted Cash Flow September 2nd, 2021

The assumptions

We would point out that the most important inputs to a discounted cash flow are the discount rate and actual cash flows. If you don't agree with these results, go to the calculation yourself and play with the assumptions.

The DCF also does not consider the possible cyclicality of an industry or a company's future capital requirements, so it does not give a full picture of a company's potential performance.

Given that we are looking at Pinterest as potential shareholders, the cost of equity is used as the discount rate rather than the cost of capital (or the weighted average cost of capital, WACC), which accounts for debt. In this calculation, we've used 7.0%, which is based on a levered beta of 1.067.

Beta is a measure of a stock's volatility compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, a reasonable range for a stable business.

Next Steps:

Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?"

For instance, if the terminal value growth rate is adjusted slightly (and if the company improves monetization, it will be), it can dramatically alter the overall result. For Pinterest, there are three fundamental items you should look at:

  1. Risks: Be aware that Pinterest shows 4 warning signs in our investment analysis, which you should know about...
  2. Future Earnings: How does PINS's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
  3. Other Solid Businesses: Low debt, high returns on equity, and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NYSE every day. If you want to find the calculation for other stocks, search here.

Valuation is complex, but we're helping make it simple.

Find out whether Pinterest is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis

Simply Wall St analyst Stjepan Kalinic and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

Stjepan Kalinic

Stjepan Kalinic

Stjepan is a writer and an analyst covering equity markets. As a former multi-asset analyst, he prefers to look beyond the surface and uncover ideas that might not be on retail investors' radar. You can find his research all over the internet, including Simply Wall St News, Yahoo Finance, Benzinga, Vincent, and Barron's.

About NYSE:PINS

Pinterest

Pinterest, Inc. operates as a visual discovery engine in the United States and internationally.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation1
Future Growth4
Past Performance1
Financial Health6
Dividends0

Read more about these checks in the individual report sections or in our analysis model.

Flawless balance sheet with reasonable growth potential.