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 investment firm KeyBanc Capital Markets was quick to downplay the prospects of short-term changes.
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.
Pinterest ( PINS ) announced late last month that its co-founder/CEO Ben Silbermann is stepping back from that role to transition to executive chairman of the board.
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."
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Pinterest pops 15% as hedge fund Elliott takes stake, KeyBanc tempers optimism