With more than 250 million monthly active users, Pinterest (NYSE:PINS) has built its image discovery engine into one of the best places on the web to find recipes, fashion trends, articles, and much more. Since the company's inception, users have created more than 175 billion "pins."
But investors looking to benefit from the company's IPO -- and its unique way of serving content to its users -- may be asking the question: "How does Pinterest actually make money?"
To satisfy your curiosity, here's a video from our YouTube channel. (A full transcript follows the video.)
Narrator: Pinterest isn't your typical social media company. The company describes itself as a "visual discovery engine" — and there's hardly anything else like it on the web.
Pinterest has more than 250 million monthly active users sharing images of home decor, fashion trends, articles, recipes and much more. And all of those users have created more than 175 billion pins.
But how does all of that content make Pinterest make money?
The bulk of the company's revenue comes from Pinterest's advertising sales on its platform. In 2018, Pinterest generated $756 million in sales, up 70% from 2017.
The company says that more people use its service to find or shop for products than on social media networks, and that advertising is "native content" on its platform. Additionally, the majority of the Pins that are saved on Pinterest have actually been created by businesses.
That's great news for advertisers, because Pinterest users are the primary decision makers when it comes to buying services and products for their household. 83% of all women ages 25 to 54 in the U.S. are Pinterest users, and the company calls them "deciders" because of they're the ones calling the shots for household expenses.
But even as Pinterest's advertising revenue grows, the company is losing money. In 2018 Pinterest lost $63 million, which was a huge improvement from its loss of of $130 million in 2017. So if Pinterest brought in $756 million in sales, but still lost $63 million, where did all of that money go?
Much of it went to expenses for sales and marketing, which totaled $260 million in 2018. Additionally, Pinterest spent about $252 million on research and development, and about $242 million for its cost of revenue expenses, which include web hosting and mobile app expenses, and employee salaries. When you add all of that up, along with additional general and administrative expenses, Pinterest spent more than $830 million in 2018.
While Pinterest is still working toward turning a profit, the company has managed to increase its average revenue per user. In the U.S., Pinterest's most lucrative market, average revenue per user jumped 47% in 2018 to $9.04.
But Pinterest has lots of opportunity to grow its international sales as well. The majority of its users are outside of the U.S. and the company's average revenue per international user increased 22% in 2018.
The challenge for Pinterest will be to convince more advertisers to spend their money on its platform instead of on popular social media sites like Facebook and Instagram. But so far, Pinterest's sales and user growth has shown that this company can compete in the ultra-competitive digital advertising space.
And with Pinterest's unique way of blending content with ads, the company may not be far off from turning its visual discover engine into a profitable business.