Shares of Pinterest (PINS -0.48%) soared on Friday after The Wall Street Journal reported that an activist investor has taken a greater than 9% stake in the company. As of 10:30 a.m. ET, Pinterest stock was up 14%.
Elliott Investment Management has taken a large stake in Pinterest and has reportedly been talking to the management team about ... something. The activist investment fund often takes large stakes in public companies and subsequently points out where management is failing, in hopes of catalyzing better returns. For example, roughly one year ago, Elliott did this with pharmaceutical company GlaxoSmithKline (GSK) and utility company Duke Energy. For what it's worth, both stocks are beating the market over the past year, although returns are merely flat compared with the market's decline.
More recently, in May, Elliott published a letter regarding computer memory company Western Digital, calling for a full strategic review. It believes that if Western Digital follows its advice, the stock could double by next year.
Pinterest stock is up today because investors see Elliott's involvement as a positive catalyst for change.
As of this writing, we don't know precisely what Elliott wants Pinterest to do differently. But I wouldn't expect us to be in the dark long. As we've seen with GSK, Duke Energy, Western Digital, and others, the activist investor will most likely make its intentions and desires fully known via public letter. But until that happens, it's impossible to say whether its involvement with Pinterest will be a good thing or not.
I'm not entirely sure if Pinterest's management should be doing anything differently. Since the company went public, revenue and profitability are way up, its gross profit margin has expanded and its cash position has grown, while debt has stayed at zero. Active user growth has stalled, which is discouraging. But I believe investors are more discouraged with Pinterest's stock price, which has cratered 78% from its all-time high.
Pinterest stock popped today because of Elliott's stake, which strongly suggests the market believes it's time for major changes at Pinterest. If my inference is correct, then I disagree with the market here, based on the business fundamentals I just shared. The management team doesn't control the stock price, which I would assume is the primary reason investors are frustrated with Pinterest right now. But it's important for shareholders to separate business performance and stock performance because they aren't the same thing.