One of the most addictive features of social media is scrolling through videos and pictures. Whether it's a landscape of the Tuscan countryside on Instagram, funny videos of cats on X (formerly Twitter), or a dance routine on TikTok, viral content has a way of connecting people from all around the world.
Image-sharing application Pinterest (PINS 4.04%) is one of the forefathers of social media, but in a world dominated by Facebook and Instagram, which are both owned by Meta Platforms, some investors might worry that other social media platforms are perpetually playing a game of catch-up.
While I've expressed some concerns about Pinterest as an investment before, I will admit the company's Q3 earnings contained some positive nuggets. Pinterest continues to gain momentum with the highly coveted Gen Z population, and it's making considerable progress in its advertising and online shopping businesses. Let's dig into Pinterest's Q3 earnings report and assess if now is a good time to buy the stock.
Giving credit where it's due
There's a lot to like about Pinterest from a financial perspective. In the third quarter, the company increased revenue 11% year over year, reporting $763 million in total sales. Moreover, the fastest-growing user cohort for Pinterest is the Gen Z demographic.
Of note, Pinterest highlighted that it's bringing on several new partners for its API for Conversion service. Essentially, this product is meant to increase user engagement by improving the ad feed of end users. During the third quarter, the company onboarded Adobe and Salesforce as partners, and on the earnings call, management explained initial results have been positive. For example, apparel retailer PacSun "saw a seven times increase in attributed conversion rate" after adopting API for Conversions.
The service accounted for 28% of total revenue in August, up from 14% at the beginning of the year. This growth is encouraging and shows that user engagement is trending in the right direction, as evidenced by higher conversions of ads to sales. Moreover, the fact Gen Z remains loyal to the Pinterest platform could signal that they're choosing to shop on the app over other social media websites.
While the initial operating results look inspiring, there's a lot more for investors to unpack as it relates to the competition.
Image source: Getty Images.
The competitive landscape is tough
When it comes to the social media landscape, Facebook will always loom large with its 3.05 billion monthly active users (MAUs), up 3% year over year in the third quarter. Pinterest reported 482 million MAUs worldwide for the same period, up 8%.
While Pinterest's MAU count is growing faster than Facebook's, the latter has superior monetization. Pinterest's average revenue per user (ARPU) increased 3% year over year in Q3 to reach $1.61. On the other hand, Facebook's ARPU increased 19% to $11.23.
There are a couple of ways to interpret the data above. Some investors may come to the quick conclusion that Facebook is the superior platform, while others may think argue Pinterest has a massive opportunity to grow. To determine how lucrative Pinterest's monetization opportunity really is, investors may want to know how much time users are spending on these different social media apps.
According to Statista, U.S. users spend nearly an hour a day on average on TikTok and roughly 30 minutes each on Instagram and Facebook. Pinterest did not crack the list in Statista's report.
So while Pinterest is demonstrating it can grow in a heated market, I don't think the company is necessarily thriving. In order to make a firm decision on an investment position, a look at Pinterest's valuation is helpful.
Data by YCharts.
Should you invest in Pinterest stock?
The chart above shows the price-to-sales (P/S) ratio for Pinterest benchmarked against a cohort of social media and e-commerce platforms, including Snap, Shopify, Etsy, and Meta. Investors can see that Pinterest stock trades in the middle of the pack.
What I find most interesting about this valuation analysis is that over the past several months, Pinterest and Meta have traded relatively in line with each other (I had previously expressed concerns over Meta's dominance in a previous article about Pinterest).
As of this writing, Pinterest stock is trading near its 52-week high thanks to a nearly 20% jump following Q3 earnings. This recent momentum has pushed the stock too high to make it a particularly attractive buy right now. That said, I wouldn't necessarily avoid the stock as there are a number of key items long-term investors should consider.
First, Pinterest continues to demonstrate its platform works well with major brands, which is a nice nod of approval from external partnerships. Second, the company is engaging with users in all geographies and penetrating younger demographics that tend to shop online at higher rates. Pinterest has also been able to generate respectable growth during volatile macroeconomic periods, which tend to be difficult for businesses that sell consumer discretionary products.
To me, Pinterest is evolving from simply an image-sharing platform to a more service-oriented operation that revolves around social media. And while there's enough data to support owning Pinterest stock despite the crowded market in which the company operates, I think stocks such as Meta will ultimately generate superior returns. However, should there be a pullback in Pinterest shares, it could certainly be worth a look for those interested in diversifying their portfolios.
