Pinterest (NYSE:PINS) this month surpassed Snap's (NYSE:SNAP) Snapchat to become the third most popular social media platform in the United States by monthly users, according to a report from eMarketer. The Jan. 14 report may have come as a surprise to some investors, as the market sent shares of Pinterest stock 10% higher following the news.
Public reporting from both companies indicated as much already. Snapchat's North American user growth came in at 4% in the second quarter and climbed to 6% in the third quarter. Pinterest, by comparison, grew users 13% in the second quarter and 8% in the third quarter.
Moreover, eMarketer published its 2019 active user estimates for Pinterest and Snapchat last month, but it didn't explicitly make the connection that Pinterest surpassed the competitor. At least the market's all caught up now.
But user growth is only part of the story at Pinterest. The company has plenty of room to increase its average revenue per user (ARPU) through increased ad inventory and higher ad prices.
Pinterest disappointed investors in early November when it reported its third-quarter earnings results. Not only did the company miss revenue expectations, the bottom line disappointed as well. Management's full-year outlook came in below what analysts were looking for, too.
But Pinterest's strong user growth compared to its competitors showed its priorities lie in growing engagement. And to that end, it's succeeded. Pinterest's U.S. monthly average user (MAU) growth in the first three quarters of 2019 outpaced its growth in the same period in 2018.
Meanwhile, the company is making product innovations to improve engagement. It refined its search algorithm mid-year last year and slowly rolled out a redesigned app. Pinterest was careful to avoid the pitfalls of the Snapchat redesign by testing and iterating slowly. It took Snap over a year to recover from its botched redesign attempt.
Management says the redesign will have, at worst, a neutral impact on engagement and revenue in the short term. Long term, it opens the door for the company to build new features that could lead to greater monetization in the future -- things like shopping or interactive Pins, CEO Ben Silberman noted on the company's third-quarter earnings call.
Focusing first on laying the groundwork for strong monetization through improvements in engagement and product features is a hallmark of a management team with high expectations for growth.
The big opportunity ahead for Pinterest
Pinterest's users' interests tend to lean toward things like fashion, decorating, crafts, cooking, traveling, and fitness. As it turns out, those are some of the most valuable categories for online search advertising on platforms like Amazon.com and Alphabet's Google. Both of those companies are seeing average ad prices climb higher, opening the door for Pinterest to offer a strong alternative to marketers with better returns on ad spend. Pinterest points out that its users come to its platform with strong purchase intent, which means the potential ad prices on the platform are extremely high.
This stands in contrast to Snap, which is vying for the much more competitive digital display advertising market with other social media companies, connected TV companies, and, of course, Google and YouTube. But Snap's ARPU in the U.S. for the third quarter was considerably higher than Pinterest's. And it grew ARPU faster than Pinterest in the third quarter as well.
That trend should reverse in the near future when Pinterest begins focusing more on monetizing its user base and attracting more advertisers versus growing and improving its products.
With Pinterest currently valued at less than half the market value of Snap, even after the stock's 10% spike, there seems to be an opportunity for growth stock investors interested in what's now the U.S.'s third-largest social media platform.