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How Does Pinterest Make Money: Should I Watch This Growth Stock?

How Does Pinterest Make Money: Should I Watch This Growth Stock?

Pinterest (NYSE: PINS) has experienced substantial growth as a result of the COVID-19 pandemic as well as a surge in new users interested in the app and new investors interested in the potential for social media stocks. 

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What is Pinterest? 

Pinterest is a board-based image-sharing and social media company that uses a visual discovery engine for finding ideas like recipes, home, and style inspiration. Users can save ‘Pins’ they like to boards which keep ideas organized and easy to find. The platform is a ‘feel-good’ and inspirational place for its 416 million monthly active users (MAU), and I believe that there is still room for this figure to grow. Pinterest’s MAU figures grew an impressive 39% year-over-year (YoY), and CEO Ben Silbermann explained that “users came looking for ideas as they adjusted to life during a global pandemic”. 

 

How Does Pinterest Make Money? 

Pinterest’s main priority in the early days of the company was to gain as many active users as possible, rather than revenue growth. In recent years, now that they have a huge established user base, the company has been more focused on revenue generation. Pinterest makes all of its money from selling digital advertising; its products help businesses reach users across their decision-making journey. This is done through ‘Promoted Pins’, which are ads that contain an image or a carousel of images or video which increases user engagement. Advertisers target certain locations, demographics, or devices to reach customers who are searching for or have shown an interest in the products they offer. 

In May of this year, Pinterest and Shopify announced a partnership that enables Shopify merchants to upload catalogs to Pinterest and turn their products into shoppable Product Pins, allowing Pinterest users to quickly buy from Shopify merchants. Pinterest also has a ‘buy button’ for businesses that are integrated with platforms like Shopify, IBM Commerce, or Salesforce Commerce Cloud. These businesses can advertise on Pinterest with a buy button that enables users to buy pinned products directly through Pinterest, rather than separately visiting the merchant’s website. There is no commission fee for this, however, the feature increases practicality and conversion for advertisers, in turn increasing advertising revenue for Pinterest. Pinterest’s Q3 2020 average revenue per user (ARPU) was $1.03 per user, up from $0.90 in Q3 2019.  

 

Should I watch this stock? 

In 2019, Pinterest generated an impressive $1.143 billion in revenue, a 51% YoY increase. Q3 2020 revenue grew 58% YoY to $443 million. Although I think we may have seen some erratic and inconsistent gains due to the pandemic, I believe this revenue growth is here to stay for the long term, albeit likely at a slower pace from next year onwards. Global MAUs grew 37% YoY to 442 million in 2020, with many joining due to the pandemic, but I can see these newly acquired users will stick with the platform for the near future due to its addictive yet positive and inspirational nature. 

I believe that Pinterest’s partnership with e-commerce platforms like Shopify has yet to fully mature and is a great play by both companies. Shopify merchants can showcase their products to the 400 million+ Pinterest users, attracting more businesses to use Pinterest and ultimately increasing 3rd party expenditure on Pinterest advertising. I think we will see this feature heavily benefit Pinterest’s revenue in the next 5 to 10 years, and so I think Pinterest could be a great addition to any investment portfolio. 

 

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