Markets

Buy this unique social media company before the upcoming bull market

A significant reason that many investors have avoided Pinterest (PINS -0.77%) over the past year there has been a decline in the user base – terrible for a young growing company. However, its Q3 2022 earnings report showed evidence that the worst is over for Pinterest, with user growth returning.

What’s more, some are now seeing significant improvements when the economy improves. So the question for investors is should you buy or avoid the stock, given the prolonged poor economic environment?

Suppose you have a long-term mindset; now may be the time to buy Pinterest, a stock that has fallen significantly from its all-time high. Here’s why.

Pinterest ads are very effective

Many call Pinterest a social media company when it’s more of a visual discovery engine for finding ideas. As a result, people use the platform differently than other social media websites, and its advertising is a unique animal.

People go to platforms like Meta Platform‘s Facebook and Instagram, Snap‘s Snapchat or TikTok to connect with people and share pictures or fun videos. But many people find the ads on most social media websites to be distracting, making them less effective. On the other hand, many people come to Pinterest to look for shopping ideas with the intention of buying, and users react differently to its ads.

Pinterest ads come in the form of what the company calls Pins. Each advertiser pays for placement in the areas where people are likely to see them – feeds on the target user’s home page and search results. Since many people on the service search for Pins organically, the ads are less intrusive and advertisers see more favorable responses. For example, statistics show that customers on Pinterest spend 80% more than users on other platforms and have a 40% larger basket. Pinterest, at 2.3 times higher, also has a more effective cost per conversion than ads on other social media sites, with twice the return on ad spend for retail brands. These statistics mean that Pinterest ads cost less and are more effective.

Many advertisers also favor Pinterest because it can effectively handle different types of ad campaigns during the sales process. For example, it can launch brand awareness campaigns, direct consumers to research products on an advertiser’s website, and can guide purchasing decisions. This wide variety to address the different needs of advertisers provides a significant opportunity to increase its market share in the $600 billion digital advertising market.

Built to recover from a horrible macro environment

Pinterest has consumed this market doing more than just sitting around. Instead, Pinterest spent 2022 investing in initiatives that drive sustainable, long-term growth.

One initiative involves increasing user engagement, which it achieves by expanding and improving the platform’s image and video content. Another growth strategy is creating more relevant user experiences, especially for Gen Z, using machine learning to find and recommend more relevant content for users.

Management attributes its return to seasonal sequential growth in global and US users in the third quarter of 2022 to these growth initiatives. Additionally, it is gaining momentum with Generation Z, with growth accelerating from the second quarter and showing double-digit year-over-year growth. So the company has positioned itself for future user growth, especially as the economy recovers. Moreover, it plans to return to a significant margin increase next year and has already started rationalizing costs.

Finally, despite the economic downturn, it still grew revenue by 8% in the third quarter, has a strong balance sheet with roughly $2.7 billion in cash and no long-term debt, and continues to generate strong free cash flow. Management built this company to survive the crisis while generating solid revenue growth and profitability.

One word of caution

The Wall Street Journal reported that Meta is now facing huge fines for violating the European General Data Protection Regulation (GDPR) privacy laws. Moreover, the EU could force Facebook and Instagram to change their terms of service that require users to accept ads based on their digital activity. While it’s unknown how this news affects Pinterest today, a negative ruling could ultimately negatively affect how investors value Pinterest – a risk to keep in mind.

Still, despite a shrinking user base during the pandemic recovery period, Pinterest has grown revenue — a sign that the platform is attractive to advertisers and can monetize users faster than user growth. Now that the company appears to be on the verge of growing user numbers again, it could be a great time for long-term growth investors to pick up a few shares. This is a solid consideration as Pinterest trades at a price of 5.9, which is close to its lowest value as a public company.

Randy Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, serves on The Motley Fool’s board of directors. Rob Starks Jr has positions in Pinterest. The Motley Fool has positions and recommends Meta Platforms and Pinterest. The Motley Fool has a disclosure policy.

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