Pinterest (PINS 0.88%) was one of the unintended beneficiaries of the pandemic's onset. Folks instantly were spending more time at home, giving rise to an increase in demand for at-home entertainment options. The company experienced a further tailwind as people were more often undertaking DIY projects and cooking, and visiting Pinterest for inspiration.
That said, the economic reopening is reversing those trends, and Pinterest is suffering as a result. The company has lost monthly active users for three consecutive quarters, and its stock is down considerably from its all-time high. The sell-off has Pinterest trading at a bargain price, according to the following metric.
Pinterest's price-to-free cash flow ratio suggests it is cheap
Pinterest is trading at a price-to-free cash flow ratio of 23. That's the lowest it has sold for in its young history as a public company with a positive free cash flow. Comparing Pinterest to its social media peers Twitter, Snap, and Meta Platforms, only Meta sells for a lower price-to-free cash flow ratio (see chart below).
Admittedly, some reasons justify Pinterest's low valuation. For one, the company has shed 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. The continued losses are an added risk for investors who are uncertain how far down these numbers will go.
Note that like its peers, Pinterest is free to join and use. It makes money by showing advertisements to users browsing the platform and app. Therefore, active users are critical to its success. Moreover, increasing engagement from existing users is another crucial factor in its success. In that regard, there is another reason that could justify Pinterest's decreasing valuation: Management noted that Pinterest is losing out on the competition for people's time. Short-form video site TikTok is gaining popularity among younger consumers, and it's taking away from Pinterest.
In response to an analyst question about how Pinterest plans to reverse losses in users, CFO Todd Morgenfeld said: "I think the short answer to your question is we're investing in our short-form video content, creator-led content, native content ecosystem to address exactly that point. And we think that's the path toward enriching the user experience and building connections to shopping experiences over time that will drive frequency of use, more people to the platform and over time, a connection to shopping and commercial activity that will differentiate the platform, both with respect to users and advertisers."
Cheapness doesn't necessarily make Pinterest stock a buy
Just because Pinterest's stock sells at a low price-to-free cash flow ratio doesn't necessarily make the stock a buy. However, looking at Pinterest as a whole makes the case more compelling. Pinterest has increased revenue from $473 million in 2017 to $2.6 billion in 2021. That rapid revenue growth scaled the company enough to earn $316.4 million on the bottom line in 2021.
Still, it may be best for investors to wait for Pinterest to show it can stop user losses and turn that trend around before starting a position. Sure, you might have to pay a higher price at that point, but it will be worth it for removing a significant risk.