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1 Company That Could Benefit From Rising Ad Prices on Amazon and Google

By Adam Levy - Updated Oct 23, 2019 at 3:08PM

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This search engine could offer better returns for marketers' ad spend.

Advertisers spend nearly all of their digital search advertising budgets on Google and Amazon (AMZN -1.24%). The two combine to take 86% of the market, according to a recent estimate from eMarketer. That number will climb even higher over the next couple years, as Amazon's growth more than offsets market share losses at the Alphabet (GOOG -0.55%) (GOOGL -0.61%) subsidiary.

But after years of growth, Amazon's primary path forward may be increasing average ad prices. Meanwhile, like-for-like clicks on Google continue to rise in price every year. For search marketers looking for alternatives, there aren't very many options. Amazon dominates product searches, and Google's search engine is preferred for just about everything else.

But one company has carved out a small niche of valuable searches: Pinterest (PINS 0.09%). It may be able to attract new ad buyers as marketers look to find improved return on investment for their dollars.

A woman holding an iPad displaying the Pinterest app.

Image source: Pinterest.

Pinterest is a search engine, not social media

If you asked Pinterest's management what exactly its main consumer product is, they'd say, "Pinterest is a visual discovery engine." That's what it writes in its quarterly reports.

But a key part of that "discovery engine" is the ability to type in search terms and get back relevant results. Content is curated by its users and search results are refined by algorithms and computer vision artificial intelligence (AI). In the company's second-quarter letter to shareholders, management wrote it plans to continue investing in its "recommendation engine and computer vision technology" in order to "improve the core user experience on Pinterest." Both impact what users see when they first log in and what they find when they perform a search.

So what kinds of stuff are Pinterest users searching for? The most valuable stuff.

Pinterest is often used to collect thoughts and discover decorating and fashion ideas. As such, some of the earliest ads on Pinterest focused on shopping. Many advertisers have gravitated to Amazon search ads because of the strong purchase intent related to an Amazon search. While Pinterest users might not be as ready to buy as Amazon searchers, they're certainly making a lot of valuable searches around fashion and home decor. In fact, Amazon tops the list of Pinterest's biggest competitors.

Pinterest also points out users are searching for travel destinations, recipes, crafts, and exercise routines, all of which have strong monetization potential. Online travel agencies spend billions on Google ads every quarter, for example. The health and fitness and food and beverage industries are also some big spenders on search ads.

Taking on YouTube

Pinterest has made an effort to bring more video onto its platform this year, specifically focusing on how-to videos. That's YouTube's forte. CEO Sundar Pichai said there are over 1 billion learning-related video views on YouTube every day.

Over the summer, Pinterest made it easier for businesses to upload videos, and management notes videos receive higher engagement than static images. As such, video is an appealing new ad format on Pinterest that could draw a lot more demand over the next few quarters, especially as an alternative to YouTube.

As video content and engagement grows on Pinterest, it opens up a lot of valuable advertising inventory. Combined with the valuable searches Pinterest users perform on its platform, it should draw a lot of attention from marketers as the company continues to improve its ad products and measurement capabilities. Not to mention the rapidly growing user base, which topped 300 million monthly active users in the second quarter, up 30% year over year. That's still minuscule compared to Google, but it's certainly closing in on Amazon.

The two digital advertising tech giants are big enough that they don't have to worry about Pinterest stealing business, but it could have an impact on how high average ad prices climb on those platforms as marketers seek better returns on their investments. For Pinterest, it doesn't really need to steal much from the industry leaders in order to grow revenue. Management expects to generate just $1.1 billion this year, which is just a fraction of what marketers spend on Google and Amazon.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Alphabet (C shares) and Amazon. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, and Pinterest. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Pinterest Stock Quote
Pinterest
PINS
$22.55 (0.09%) $0.02
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOGL
$117.47 (-0.61%) $0.72
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$140.80 (-1.24%) $-1.77
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOG
$118.22 (-0.55%) $0.65

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