From broken IPO to stock market darling, 2020 has been a transformational year for Pinterest (PINS 8.99%). Following its market debut in April 2019 through the end of last year, the stock fell over 20%. The S&P 500, by contrast, was up 11% over that span. But Pinterest stock has surged 259% year to date, making it one of 2020's top winners.
After run-ups like this, investors invariably wonder if it's too late to buy. In response, I say if Pinterest stock was only good enough to make shareholders money over the last eight months and nothing more, then it's one of the worst stocks I've ever heard of. But the truth is, Pinterest is among my favorite stocks for the long haul.
Here's why Pinterest stock will likely go up long term
Recently, a new social media app called Parler raced to the top spot in Apple's and Google's (from Alphabet) app stores. According to the Wall Street Journal, Parler's user base has surged to over 10 million people, most joining in recent weeks. Apparently, the trend is politically motivated. People displeased with fact-checking policies at Facebook and Twitter are looking to Parler, since it expressly won't intervene with what's said or shared on its platform.
Parler doesn't yet pose a real threat to Facebook and Twitter -- that's not the point. This simply highlights the negative feelings some people have toward certain social media platforms. By contrast, Pinterest has an opportunity to be a much more positive platform for its 442 million users. In management's own words from the third-quarter letter to shareholders: "[A]t Pinterest, we continued to focus on what we can control [...] This included giving Pinners and brands a positive place to be online during a divisive election in the United States."
By avoiding political discussion and advertisements, Pinterest can be a calming place users escape to. This could prove to be a quasi-moat to its business long term. And it might explain why Pinterest's user base is surging like that of Parler. The company has added over 100 million new monthly active users so far in 2020.
A growing user base bodes well for Pinterest. But for this to be a market-beating investment, the company must monetize those users better. In 2019, it averaged $0.95 in quarterly global average revenue per user (ARPU). As of the third quarter of 2020, ARPU was $1.03, so monetization is improving, but it needs to continue. And to that end, Pinterest already has some good options it's actively pursuing.
First, Pinterest is trying to blur the lines between its inspirational image database and e-commerce. Retail companies are starting to directly upload their catalogs to the platform. After all, people likely search Pinterest, because they have an idea in their head of something they want. Now with catalog integration, once they find it, they can just shop from the pin. Furthermore, Pinterest teamed up with Shopify to extend this benefit to small businesses.
Second, Pinterest is trying to educate businesses on how to advertise on the platform. Many already know about Facebook and Google. But when it comes to understanding what kind of return on investment can be expected on Pinterest, there's still a lot of education that needs to happen, especially in international markets. Pinterest is actively producing educational tools to increase awareness.
Through these two initiatives, among others, Pinterest can monetize its growing user base and prove to be a market-crushing investment over the next five to 10 years.
But will Pinterest stock go up more right now?
By asking if it's too late to buy Pinterest stock, potential investors are actually wondering what the stock is about to do right now. In other words, is it immediately going up, or should investors wait on the sidelines for a cheaper entry point? That complex question requires a more nuanced answer.
Pinterest stock could absolutely go down in the short term. Rising coronavirus cases threaten to shut down global economies, which could cause a devastating spike in unemployment. Rising unemployment and locked-at-home consumers could persuade companies to temporarily forego ad spending, as was the case earlier this year.
But Pinterest stock could also go up. Perhaps the coronavirus vaccine will quickly end the pandemic, boosting the economic recovery already underway, resulting in Pinterest's best year ever next year. I don't know. No one does.
Since we can't predict the near-term future, then we can only play the long game. But if you're still worried about the short term, consider dollar-cost averaging. Divide your desired investment into pieces and regularly invest on a predetermined schedule to prevent emotions from clouding your judgment. If Pinterest stock goes down, you'll get a better price. But if it goes up, you won't miss out on a market beater.