A Deep Dive into Monetization Growth #CanadaFinance
Financial Insights That Matter
Investment Thesis
Because of its wide range of product categories, Pinterest’s user base is a desirable target for advertisers, especially in markets outside of North America and Europe. It is anticipated that the platform’s e-commerce investments will strengthen its value proposition, resulting in higher ad spending and higher average revenue per user. Instagram could, however, use its Collections and visual search features to boost engagement by utilizing its larger user base. International users of Pinterest, who have been accustomed to almost ad-free service, might not be successfully monetized since they anticipate little disruption in their feeds. The company might not make much money from its investments in AI and e-commerce.
Social Media Platforms: In terms of visual content, Instagram and TikTok are Pinterest’s main rivals. Instagram’s Stories, Reels, and shopping integrations invite users who want inspiration and product discovery, which coincidentally is Pinterest’s function. TikTok’s short-form videos are done as a creative idea source, targeting younger audiences. These two platforms already have double the users and much more activity, which makes them interesting for advertisers to work with. Snapchat’s Discover, a visual content discovery feature, competes as visual content discovery channel as well.
Search Engines: Visual search capabilities of Pinterest are contended by Google via Google Images and Google Lens. As the world’s largest search engine with vast data and advanced algorithms, Google ensures high efficiency in the detection of the most fitting ideas or products, which consequently may act as a factor reducing Invites’ ability of exhibiting ideas. The power of being first in the search line supports its position in competition.
E-Commerce Platforms: Amazon and Etsy are the platforms that mostly challenge Pinterest’s dealings with product finding. The visual shopping features of Amazon and Etsy’s dedication to selling distinct, made by hand items are the outlets growing users’ demand for combination ideas and consumerism. The creation of e-commerce social and visual elements that are like Pinterest’s, makes them some sort of rival to Pinterest.
Niche Platforms: Websites that target a specific market like Houzz (interior design) and Allrecipes (cooking) in that they offer targeted content that is better than Pinterest for them.
Investment Upsides
Because of its network effect and intangible assets, Pinterest, an app that focuses on search and discovery, has a narrow economic moat. Despite competition from firms like Alphabet and Meta, Pinterest will be able to grow its share of ad spending thanks to its unique platform. Over the next ten years, it is anticipated that the company’s ongoing advancements in ad-targeting, user monetization, and user expansion will surpass its cost of capital. Users of the free social media site Pinterest can gather and save ideas in the form of pictures and videos on a variety of subjects, such as food, travel, and interior design. Users can upload images and videos of these items and concepts for other users to see and use as inspiration. On Pinterest, each incremental post is referred to as a pin, and a board can be created by combining several pins.
With more than 500 million users, Pinterest gives advertisers the opportunity to show their ads to people who have expressed interest in topics that are directly related to or close to their products. Advertisers can use Pinterest’s user base of over 500 million to target users who have expressed interest in areas that are directly related to or adjacent to their products. This is especially useful for advertisers in end markets like fashion, travel, and home improvement.From the standpoint of an advertiser, Pinterest offers a unique channel for digital advertising expenditures. Together with particular end-markets, the company’s female skew makes for an appealing and extremely niche target market for advertisers. Since about 90% of Pinterest searches are unbranded, advertisers can attract potential customers and increase brand and product awareness without having to overtake an established user.
The company can target users with more relevant ads based on their interests thanks to Pinterest’s high-quality data gathered from user engagement with the platform. Together with Pinterest’s unique user base, these data create intangible assets that give the company a competitive edge in the highly competitive digital advertising market. Pinterest’s rising average revenue per user (ARPU) for 2023 is $6.44, up from $3.07 in 2018, demonstrating the platform’s growing significance to digital advertisers. As Pinterest keeps making investments in its ad monetization and user engagement algorithms, more advancements in its ARPU are probably in store. Furthermore, as of 2024, Pinterest had more than $2.5 billion in cash and marketable securities, indicating a strong financial position. The cash-generation profile of the company is solid and getting better. Although consistent GAAP profitability has not yet been reported, 2025 is anticipated to see robust growth as a result of investments in AI-related features and e-commerce, while research and sales expenditures are being curtailed.
Pinterest’s ARPU Doubles Since 2018: A Deep Dive into Monetization Growth
Pinterest’s ARPU grew at higher rate than Meta’s ARPU from 2018 to 2023 by 2.6%. This is indicative of Pinterest’s momentum and the steam of growth that Pinterest currently has.
Intrinsic Valuation
Pinterest’s ARPU Doubles Since 2018: A Deep Dive into Monetization Growth
The target price for PINS is $34.52, presenting a modest upside for investors. For the next five years, the management expects Pinterest’s top line to increase at a compound annual growth rate of 14%, driven by both increased user numbers and better monetization. Through better monetization, the company is anticipated to increase sales in higher-value markets, mainly the US and Canada. As the company makes more investments in e-commerce and AI tools, its ARPU should increase. It is anticipated that the global ARPU will rise from $6.94 in 2024 to $9.68 in 2029. It is anticipated that Pinterest will grow its user base, mostly by drawing in new users from outside of North America and Europe. Improvements in ARPU are anticipated to help Pinterest as digital advertising expands and developing nations become more digitally savvy. Over the next five years, the company’s operating margins should significantly improve, reaching GAAP operating margins of 22% in 2029.
Notable Guru Holdings
Pinterest’s ARPU Doubles Since 2018: A Deep Dive into Monetization Growth
Gurus like Cathie Wood have offloaded shares in Pinterest past few quarters indicating their growing skepticism on the company. After having a great run from Q4 2023 to Q2 2024, the stock returned to 2022-levels of higher end of $20 per share. Even the activist hedge fund Elliott also had disclosed 9% stake back in 2022 and the stock rallied following the disclosure. But it appears the stock has lost its charm to investors.
Investment Downsides
Increased digital ad spending is anticipated to help Pinterest, a well-known social media platform, but future returns are uncertain due to competition. Because there is execution risk involved in converting these investments into increased ad revenue, the success of its user engagement and ad monetization investments is uncertain. Despite this, Pinterest has a bright future because it can increase average revenue per user in all regions and attract users in underdeveloped markets. However, advertisers may pool their money to purchase ad properties from giants like Meta and Alphabet, posing a threat to Pinterest’s core advertising business. There are governance, social, and environmental risks associated with the company’s heavy reliance on user behavior data.Furthermore, a major ESG risk is the effect that social media has on users’ mental health, especially among teenagers. Pinterest’s advertising business may be impacted by bipartisan support in the US for stricter regulation of social media platforms.
Portfolio Management
It is believed that Pinterest will gain value from its investments in image recognition and artificial intelligence. With more than 1 billion user-saved posts each week, Pinterest is concentrating on e-commerce and artificial intelligence (AI) tools to enhance search results and ad targeting. Pinterest can be a legitimate rival by utilizing AI and concentrating on e-commerce, even though it might not have the resources or scale to take on bigger digital advertising behemoths like Alphabet and Meta. With more than $2.5 billion in debt-free cash and positive free cash flows, the company’s balance sheet is solid. Because it presents itself as a social media platform with business goals, Pinterest’s investments in e-commerce and AI tools, like Buyable Pins and Pinterest’s Lens, are regarded as wise investments. Pinterest is in a good position to make more investments in e-commerce and artificial intelligence (AI) to enhance user engagement and ad targeting because of its solid balance sheet and positive cash generation. Over the last five years, the company has spent less than $125 million on two acquisitions, but it has not been an active buyer of other businesses.
This article first appeared on GuruFocus.
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