Pinterest (NYSE:PINS) shares popped more than 15% on Friday on a report that activist hedge fund Elliott Management has taken a stake in the social-media company, though analysts were quick to downplay the prospects of short-term changes.
KeyBanc Capital Markets analyst Justin Patterson said Elliott was likely attracted to Pinterest (PINS) for multiple reasons, including a weak share price, “stagnant user growth,” the fact it has “intrinsically” high margins and can generate “meaningful” free cash flow and the fact operating expenditures for 2022 are outpacing revenue growth.
“While it is unclear if M&A is back on the table, we believe it is highly likely that Elliott pushes for a review of the executive team (ex-new CEO Bill Ready) and strategy, and advocates for greater expense discipline and share repurchases,” Patterson wrote in a note to clients. The analyst added that the initial pop in the share price “could moderate” as investors await more details.
In addition, Patterson noted that Elliott, founded by Paul Singer, has previously taken activist stakes in other tech companies, including Twitter (TWTR) and eBay (EBAY), but the time from when the initial stakes were reported to any meaningful action were several months.
“Coupled with the path of returns in Elliott’s eBay activist stake, we believe this illustrates a key point: activist campaigns take time to implement, and sometimes it is prudent to wait before following the activist into a new position,” Patterson explained.
Wolfe Research analyst Deepak Mathivanan noted that there could be three scenarios that take place, but none of them are likely to occur in short order.
The first scenario is better operations and executions, with Mathivanan noting that Pinterest (PINS) has “the largest untapped potential” among its coverage. By growing faster and more profitable, shares could reach $33.
An acquisition by a another company could also happen, as evidenced by the fact Microsoft (MSFT) and PayPal (PYPL) and Microsoft were both rumored to buy the company in February and October 2021, respectively.
“We firmly believe that Pinterest is still an attractive media asset (430m MAUs) for a strategic with better monetization capabilities down funnel,” the analyst wrote, adding that shares could be worth $36 if a deal happened.
If the company went private, Pinterest (PINS) could be worth as much as $49 per share, using recent private equity comparisons.
“Although PINS’s financials don’t fit the profile of a traditional PE buyout candidate, we think PINS can unlock potential as a private entity without the quarterly scrutiny of KPIs more effectively,” Mathivanan explained.
On Thursday, investment firm Morgan Stanley noted that Pinterest (PINS) saw a 9% decline year-over-year in total time spent during the second-quarter, which the firm said was the “smallest amount of minutes since 2017.”