How does Pinterest make money: Should I watch the growth stock?

Pinterest (NYSE: PINS) has experienced substantial growth as a result of the COVID-19 pandemic as new users flocked to the app. This rapid growth has made more investors interested in the potential of social media stocks, but should you watch Pinterest? 

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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, homes, 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 478 million monthly active users (MAU), and I believe that there is still room for this figure to grow and with it, so too will its revenue. 

How Does Pinterest Make Money? 

Pinterest’s main priority is now 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. 

Recently, Pinterest has also begun testing online events. On May 24th, it hosted a three-day digital event where Pinterest live-streamed content from its most popular content creators. Hosting online events has exciting potential and selling tickets should bring in more revenue for the company outside of ads.  

Pinterest and Shopify announced a partnership last May 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. 

Should I watch Pinterest? 

In Q1 of 2021, Pinterest generated an impressive $485 million in revenue, a 78% YoY increase. As lockdowns and restrictions begin to lift across the globe, this revenue growth is impressive and calms shareholders’ worries that the app only brought in so much cash because of the spike during the start of the pandemic. However, the drop in new users in Q1 spooked investors and the stock fell almost 10% following the financial report. 

Investors expect Pinterest’s growth to continue, albeit likely at a slower pace from next year onwards as the effects of lockdowns wear off. With many new users joining due to the pandemic, I can see these newly acquired fans sticking with the platform for the future due to its addictive yet positive and inspirational nature. Pinterest’s user growth is slowing as lockdowns ease, but its average revenue per user is on the rise, hitting $1.04 per user in Q1 2021.

The company is also making progress with its international expansion plans. For the first quarter, international revenue grew 170% compared to the year prior, up 65% YoY, representing nearly 20% of its total revenue for the first time ever. During the first three months of the year,  the social media firm launched advertising in Brazil, its first Latin American market, and the company plans to do the same in Mexico in Q2.

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 its products to almost 500 million Pinterest users, attracting more businesses to use Pinterest and ultimately increasing third-party expenditure on Pinterest advertising. I think we could 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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