More than six months into a global pandemic, uncertainty continues to roil the market. Consumers have shifted to digital solutions at an accelerated rate, and social media has become the go-to point of contact for business and news alike.
In this maelstrom, hobby and interest-sharing platform Pinterest (PINS +0.11%) feels like an island of soothing positivity. With more users than ever before and stressed investors searching for a place to park their dollars long term, could this fast-growing platform be the next big winner?
Monthly user counts promise high potential
At the end of the second quarter, Pinterest boasted 416 million monthly active users around the world, rivaling if not exceeding the reach of competing apps such as Snapchat and Twitter. In fact, it may come as a surprise to some that the Pinterest community has been growing its user base more than 25% every quarter for over a year.
Image source: Pinterest.
The potential inherent in this growing platform is high. Year-over-year revenue growth in the second quarter was just 4%, since ad placement drives much of the top line, but revenue did increase 51% in 2019. As advertisers pared back on their campaigns in the first half of 2020, average revenue per user (ARPU) for Pinterest remained low and actually declined 21% in the latest quarter to $0.70.
Does this mean Pinterest might suffer the same fate as Twitter with a substantial user base but one where the company struggles to monetize the engagement on its platform?
Monetization efforts roll forward
Contrary to the second quarter's slowing revenue growth, Pinterest is actually on the cusp of real progress toward profitability. Total revenue had been leaping upward pre-pandemic, and monthly active users are rapidly expanding the company's pool for monetization. In May, Pinterest also announced a new partnership with Shopify, pivoting toward social commerce by making pins clickable for easy purchase.
Although ads bring in nearly all of the company's income at the moment, increasing its efforts to monetize via social commerce is the right move. Consumer adoption of digital shopping has surged during the pandemic, and a stunning 90% of Pinterest users who pin weekly end up making a purchase decision based on their browsing. Given that sales from products sold through social platforms are expected to reach $23.3 billion by the end of 2020, Pinterest now has significant monetization potential based on this move alone.
If social e-commerce penetration among the company's user base continues to expand, that would result in millions of purchases funneling partner commissions into the company's pockets. And the overall market potential for Pinterest is staggering -- a successful push here could go a long way toward increasing the company's ARPU, which lags that of its peers, helping to push this tech stock into profitable territory.
Granted, Pinterest posted incredibly high net losses in 2019 on the back of sky-high research and development expenses, and the second quarter adjusted EBITDA loss margin also worsened from 10% to 12% of revenue. Management seems to understand that rapid monetization is key to its momentum and long-term future.
CFO Todd Morgenfield likened the interesting-sharing platform to a digital version of browsing in physical shops. In the first half of 2020, the number of Pinterest users who came to the platform with commercial intent grew by 50%, and product-only searches through the platform grew eight-fold. On the inventory side, the company enjoyed a 350% sequential growth in shoppable content in the second quarter of 2020, largely driven by the Shopify integration that premiered in May.
All told, Pinterest's efforts to capture part of the social commerce market are lining up and pointing to future gains -- if users can be funneled into the growing shopping experience on its platform. The monetization efforts are still in their early stages, however, and only time will tell if the company is able to fully take advantage of its large active user base.
