Facebook (NASDAQ:FB) and Pinterest (NYSE:PINS) offer investors two very different ways to invest in the social media sector. Facebook’s namesake platform is the world's top social network, and roughly 3.1 billion people use its entire family of apps -- including Facebook, Messenger, Instagram, and WhatsApp -- each month.
Pinterest’s virtual pinboards, which emphasize hobbies and interests over personal information, serve over 400 million monthly active users (MAUs). It's much smaller than Facebook, but it's popular with older female users and brands that want to promote a "social shopping" experience with its shoppable pins.
Both stocks have generated big returns for patient investors: Facebook's stock has risen more than sixfold since its IPO eight years ago, while shares of Pinterest have advanced over 80% since its IPO last April. But looking ahead, which social media stock will deliver bigger returns?
How fast is Facebook growing?
Facebook generates most of its revenue from ads, which are sprinkled across its main platform, Instagram, and its Audience Network -- which injects ads into third-party mobile apps.
Facebook's revenue rose 27% to $70.7 billion in 2019, but its earnings declined 15% due to higher investments and legal expenses. In the first half of 2020, Facebook’s revenue grew 14% annually to $36.4 billion, as its earnings nearly doubled. Its namesake platform's MAUs grew 12% year over year to 2.7 billion in the second quarter, with sequential and annual growth across all its global regions.
Facebook expects its ad revenues to rise "roughly" 10% annually in the third quarter but didn't provide any additional guidance due to COVID-19. Other headwinds -- including Apple's upcoming crackdown on user tracking apps in iOS 14, an organized boycott of its ads due to hate-speech concerns, and recent regulatory probes -- could all impact its growth.
Analysts expect Facebook's revenue and earnings to rise 13% and 23%, respectively, this year. Its stock isn't cheap at 33 times forward earnings, but the company's resilience throughout the COVID-19 crisis, its stabilizing profit growth, and the growth potential of its secondary platforms -- especially Instagram -- could justify that slight premium.
How fast is Pinterest growing?
Pinterest generates all its revenue from its ads, which are served up with promoted pins that can be customized with images, videos, animations, and interactive content. Pinterest's core audience consists of affluent, older females, but it's been gradually gaining more users under the age of 25.
Pinterest's revenue rose 51% to $1.1 billion in 2019, but its net loss widened. In the first half of 2020, Pinterest's revenue grew 18% to $544 million, while its net loss narrowed to $242 million. But on an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) basis -- which excludes stock-based compensation and other variable expenses -- its net loss widened from $64 million to $87 million.
However, Pinterest's MAUs grew 39% annually to 416 million during the second quarter, marking its strongest user growth since its IPO last year. Most of that growth came from its international MAUs, which rose 49% to 321 million. Its international revenues surged 72% annually to $41 million, or 15% of Pinterest's second-quarter revenue, and offset a 2% decline in its domestic business.
Pinterest expects its third-quarter revenue to rise more than 30% annually as businesses ramp up their ad spending again, but it didn't provide any guidance for the full year. Analysts expect Pinterest's revenue to rise 25% this year but its bottom line to remain in the red. As such, Pinterest doesn't have a price-to-earnings (P/E) ratio but trades at 11 times next year's sales -- which is higher than Facebook's forward price-to-sales (P/S) ratio of 7.
The winner: Pinterest
I own shares of Facebook instead of Pinterest, but the former looks less appealing than the latter at current prices. Facebook's growth remains stable, but it's becoming a popular punching bag for regulators, privacy advocates, civil rights activists, and socially responsible brands.
Pinterest isn't profitable, but it's carved out a defensible niche in the social media sector that can be smoothly blended with the e-commerce market via shoppable pins and catalogs. Facebook's decision to kill off Hobbi, its clone of Pinterest, is also a clear vote of confidence for the newer platform.
Pinterest is a riskier investment than Facebook, but the potential rewards could outweigh the risks. Facebook is still a solid investment but needs to overcome its near-term growing pains to stay ahead of nimbler underdogs like Pinterest.