What happened
Shares of pictorial social media company Pinterest (PINS -0.52%) slid nearly 4% in early trading on the Nasdaq Tuesday and remain down 2.3% as of 10:30 a.m. ET.
You can blame Morgan Stanley for that.
Image source: Getty Images.
So what
"There's too much uncertainty" about Pinterest's growth prospects to continue recommending the stock, opined Morgan Stanley this morning in a note covered by StreetInsider.com.
The analyst had hoped that Pinterest would be able to "continue to rapidly innovate and improve its user offerings (to drive retention, growth and engagement) and ad offerings (to capitalize on its social shopping opportunity)." Instead, "multiple larger forward rev headwinds" are combining to slow the stock down. For three consecutive quarters, Pinterest has delivered revenue guidance below what the analyst was predicting. Even more concerning, Pinterest's U.S. monthly users number has shrunk by 12 million since Q1 2021, indicating that the company's popularity is currently shrinking, not growing.
Simultaneously, warns Morgan Stanley, time spent per user on the site has shrunk by anywhere from 1% to 19% in each of the past four quarters.
Now what
Result: Morgan Stanley says Pinterest's "total US user minutes" have rolled back "to 2017 levels." This explains why Pinterest stock is now trading back at $26 and change -- or about where it was shortly after its April 2019 IPO -- and why Morgan Stanley has cut its price target to $30 and downgraded Pinterest stock to "equal weight."
But I think that's a mistake.
Has Pinterest hit some headwinds? Undoubtedly. But this business is most definitely not as it was in 2017. Instead of losing money and burning cash (as it was five years ago), Pinterest is today profitable ($316 million in trailing net income) and tremendously free-cash-flow positive -- $742 million -- according to data from S&P Global Market Intelligence.
Valued on free cash flow, that works out to a 23.5 multiple. And with most analysts in agreement that Pinterest will pull out of its present slump and triple its net income under generally accepted accounting principles (GAAP) over the next five years, I still believe that Pinterest stock is a buy.
