Pinterest Analyst Says Elliott Management's Impact 'Could Be Limited': What Investors Should Know

Pinterest Inc (NYSE: PINS) rallied 14.8% on Friday following reports that activist investor Elliott Management has taken a 9% stake in the company.

What Happened? On Thursday, the Wall Street Journal reported Elliott Management has taken a sizable stake in Pinterest and has been conducting talks with the company. Pinterest has been struggling with declining monthly active user numbers, and former CEO Ben Silbermann stepped down from the position in June. Prior to Friday's gains, Pinterest shares had been down 75% over the past year.

Related Link: Here's Why Pinterest Stock Is Popping Off Today

Why It's Important: On Friday, KeyBanc analyst Justin Patterson said there are likely four reasons Elliott is interested in Pinterest:

1. The stock has significantly lagged in recent months.
2. The company's user growth has stagnated.
3. Pinterest has intrinsically high margins and significant free cash flow potential.
4. The company's estimated 2022 operating expenses are significantly higher than its 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 said.

Related Link: Where's Pinterest Stock Headed After Surging 35% On Elliot Management Stake?

However, he said the initial share price reaction in the stock will likely moderate as investors await more details on Elliott's plan for Pinterest.

Elliott previously took activist stakes in Twitter Inc (NYSE: TWTR) and eBay Inc (NASDAQ: EBAY) which also triggered positive knee-jerk reactions in the market.

Petterson pointed out that both of those stocks significantly underperformed the Nasdaq over the following two years.

KeyBanc has an Overweight rating and a $36 price target for Pinterest.

CFRA analyst Angelo Zino says Pinterest has an attractive balance sheet and has suffered severe earnings multiple compression over the past year, but it may be somewhat difficult for Elliott to make meaningful changes to unlock value in the stock.

"Elliott's ability to look for change could be limited given PINS's original founders — Ben Silbermann, Paul Sciarra and Evan Sharp — have about 74% of the total voting power given the dual class structure," Zino said.

CFRA has a Buy rating and a $30 price target for Pinterest.

Benzinga's Take: Pinterest shares trade at just 15.6 times forward earnings estimates, but its potential to expand that multiple hinges on its ability to generate user growth once again. Elliott's long-term track record with eBay and Twitter isn't great, suggesting additional upside following Friday's Pinterest pop may be limited.

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