Look for strong ad sales and free cash flow from Pinterest in Q3


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Pinterest (NYSE:PINS) has fallen a lot since my last post and does indeed appear to be at its lowest for the year. This is probably not justified, especially since his next publication of third quarter results will likely post positive free cash flow (FCF) as in the first and second quarters. As a result, I expect the PINS stock to rebound from current lows.

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In fact, the stock – at $ 45.61 at the October 28 close – is down more than 30% year-to-date (YTD). That’s after it hit a high of $ 89.15 on February 15 as well as a more recent high of $ 62.68 on October 20.

Going forward, I suspect that the next earnings release will act as a catalyst for this title. In my last articleI wrote that, based on its FCF production, PINS was probably worth $ 81.15 per share. This now represents a potential rise of 78% from October 28.

Where is it for Pinterest?

Last month I wrote that Pinterest produced a lower FCF margin in Q2 (16.7%) than Q1 (55.5%). However, over the first six months, the average FCF margin was 36.1%.

I used this to estimate the average annual FCF for the coming year. In fact, I applied it to analysts’ estimates for the 2022 revenue forecast. This resulted in an estimate of $ 897 million in FCF for 2022.

Then I applied a return measure of 1.75% FCF to get a potential market cap of $ 52.3 billion. This then resulted in my price target of $ 81.15 per share.

However, since then several things have happened. Although analysts have slightly lowered their revenue estimate for 2022, there is another development with some of the company’s peers that allows for more confidence.

For example, Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) just reported very strong advertising revenue and profit for the third quarter. Typically, more than 81% of its income comes from advertising. The company’s advertising sales increased 43.2% to $ 53.13 billion, an increase from $ 37 billion a year ago. In addition, total sales increased by approximately 41% overall.

This has huge implications for Pinterest, as most of its revenue comes from ad sales as well. The company relies heavily on ad sales growth to fuel its free cash flow.

Therefore, it can be assumed that because Google had a good quarter in terms of ad sales, Pinterest will have benefited as well. According to Yahoo! Finance, analysts now estimate third-quarter revenue to reach $ 631.2 million, up nearly 42.6% year-over-year (YOY) from $ 442.6 million. That’s close to the 43% gain in ad sales at Google. This should give investors in PINS shares great confidence in the forecast.

As a result, analysts will also be looking to see if Pinterest’s FCF margin will be close to the 36% average rate the company produced in the first half of the year. In fact, over the past 12 months, the FCF margin is probably even larger given that a large portion of the company’s FCF entered in the fourth quarter.

What to do with the PINS stock

For now, I’ll stick to my initial price target of $ 81.15 for PINS shares. However, I will probably have to adjust this once the November 4 results are released, depending on the quality of the company’s earnings and FCF production.

Nonetheless, it seems pretty clear that the PINS stock is priced too low here. I suspect that once its earnings are published, stocks will start to rise again.

This is based on confidence in the advertising industry, given Google’s sales numbers. It is also based on the underlying value of the PINS stock, as I have already pointed out.

As of the publication date, Mark R. Hake does not hold any position (direct or indirect) in any of the securities mentioned in this article. The opinions expressed in this article are those of the author, submitted to InvestorPlace.com Publication guidelines.

Mark Hake writes about personal finance on mrhake.medium.com and run the Total Value of Return Guide that you can consult here.

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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.

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