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Amid IPO Speculation, Pinterest Hangs a Target on Alphabet's Back

By John-Erik Koslosky - Jul 11, 2016 at 2:22PM

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The photo-driven social site is gearing up advertising efforts as investors await a possible debut on the public stock market. Should Alphabet be concerned?

Image Source: about.pinterest.com

Popular social media site Pinterest is reportedly gearing up for an initial public offering, and it's been rolling out some of its plans to appeal to advertisers. The company is poised for major growth, and at least some of that growth will certainly come at the expense of existing digital ad platforms. From what the company has divulged in recent announcements, Pinterest seems ready to make a run at the biggest player in the game, Alphabet (GOOG -1.62%) (GOOGL -1.81%). Pinterest is reportedly pivoting its ad strategy and now plans to target keyword search as a key area of advertising growth, directly competing with Google, according to a report from AdAge.

Is Google search ripe for disruption? Pinterest has some advantages it could use to take a slice of this market in the years to come.

Small company, big plans

Pinterest is a young business and still relatively small, with most of its anticipated growth still in its future. Some documents leaked last year showed an annual revenue line of just $169 million, or roughly 0.2% of the revenue Alphabet generated.

But Pinterest -- and its investors -- are expecting big things from the platform in relatively short time. Those same documents, which TechCrunch obtained last year, laid out an annual revenue expectation of $2.8 billion by 2018. That figure would put the company in the same league as Twitter today, and a little less than a fifth the size of social media king Facebook.

Of course, if it has any chance of reaching those lofty expectations, Pinterest is going to have to build out a robust ad platform that can challenge Alphabet and Facebook for marketing dollars.

Building a better ad machine

That ad platform is still largely a work in progress. The company has been unveiling features this summer, perhaps with an expected IPO announcement in the offing.

They include e-commerce features such as a shopping cart function that allows users to buy from multiple stores with one cart. Pinterest is expanding its visual search tool that recognizes products in images and lets users tap on those products. It's also beefing up its ad-targeting and measurement capabilities. 

That Pinterest is now venturing deeper into search ads probably shouldn't come as a shock to anyone following the company. Pinterest hired away a Google executive, Jon Kaplan, earlier this year. He now heads the company's global sales team. The move is significant for Pinterest, because it will give the company the chance to approach advertisers with a product that's familiar to them -- keyword search is, after all, the single most popular digital ad buy -- but offer it on a platform that has some advantages.

Signed in, ready to shop

Pinterest says it gets more than two billion keyword searches each month, compared with Google's 100 billion, but a majority of Pinterest's users already search on the site for products they're interested in buying, according to research from industry analyst Mary Meeker. On top of that, the site has a much higher percentage of mobile users than Google and a strong ability to target ads to those users, which gives it an opportunity.

Mobile search ad spending is exploding. It was a roughly $8.7 billion market in the U.S. in 2014. In one year, it had ballooned to $13.6 billion. By 2018, mobile search is expected to generate some $25 billion in the U.S. alone. That's a compound annual growth rate of 28%.

With desktop advertising leveling off, mobile search is now huge for Alphabet. And although it doesn't break out mobile numbers separately, the company has said mobile is already driving Alphabet's revenue growth, which came in at 17% year-over-year in the first quarter. It needs mobile ad growth to pick up as desktop's future dims.

It's not a Google killer, but . . .

Alphabet is far from bulletproof. No company is immune to disruption, especially in an industry like digital advertising, where companies need continual innovation to stay afloat.

Pinterest won't be eating Alphabet's lunch anytime soon, but it could prove to be a compelling challenger as Google looks to grow out its mobile search revenue.

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