Pinterest Produces Losses But the Market Pushes the Stock Higher

Mark Hake

Pinterest (PINS) stock moved 11.6% higher on Tuesday, Aug. 1, one day after the company reported ongoing losses and lower monthly average users (MAU) for Q2.

However, with rose-colored glasses on, the market saw what it was hoping for: higher revenue. Despite posting a GAAP net loss of $43.08 million, revenue was 9% higher at $665.9 million vs. $613.2 million.

That was all the market needed. The stock took off, rising 11.6% to $22.31 as of Aug. 2.

This was also despite the fact its adj. EBITDA was only $92.04 million, vs. $178.2 million in the same quarter a year earlier. That is a decline of $86.16 million, or over 48.3% from the prior year.

The Market Reaction

Never mind, the market said. At least revenue is rising and that means the company did not take a huge hit in the advertising arena like Snap, Inc. (SNAP) recently. The stock fell almost 40% in one day when it reported its Q2 results with revenue down 25%. At the time everyone was worried about a dramatic slowdown in the advertising market.

So, in a way, the market was relieved to see this was not the case with Pinterest, as its revenue rose 9% in Q2.

In fact, activist investor group Elliott Management has become the company's largest investor and issued a statement praising the company. It said the company had significant potential for growth and Pinterest had a value-creation opportunity in which Elliott Management had conviction.

In addition, the Susquehanna investment brokerage firm raised its recommendation on the stock to positive from neutral. The analyst, Shyam Patil, raised his price target to $35 from $22.

Where This Leaves Investors

This 11.6% gain in the stock today might be nothing more than a relief rally, as investors were worried about a revenue decline from lower ad revenues. It's possible the market might realize that the company's quarterly free cash flow (FCF) was actually significantly worse than the prior quarter.

For example, in Q2 Pinterest produced an FCF of just $107.1 million. That worked out to just 16% of its $665 million in revenue in Q2.

By contrast, in Q1 the company generated $213.4 million in FCF on sales of $574.9 million in the quarter. That works out to an FCF margin of 37.1%. In other words, Pinterest's FCF margin fell over 50% in Q2, despite higher revenue.

So this puts a little bit of a damper on all the ebullience. For some reason, despite higher revenue, the company's profitability and cash flow generation is deteriorating. That might not be the kind of thing that deserves a higher valuation.

As a result, value investors might want to wait for more concrete results. There are plenty of other opportunities out there. This is despite what Elliott Management, a large hedge fund that likes to take big flashy stakes in companies, thinks about Pinterest.

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Mark R. Hake, CFA writes articles at InvestorPlace.com, Barchart.com, Medium.com, and Newsbreak.com as well as a Beehiiv free newsletter on stocks and cryptos.

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Mark Hake is a financial analyst, investor, and Chartered Financial Analyst (CFA). He writes about US and foreign stocks as well as cryptos, hedge funds, and private equity. He previously ran his own hedge fund, investment research firm, and acted as CFO for a fintech startup. He focuses on finding value, arbitrage, and hidden asset opportunities.

Phoenix, AZ
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