Pinterest (PINS 0.21%) has been on my watch list for the past several weeks because of its rapid revenue growth and my bullish view on prospects for social media companies. It was set to report its third-quarter earnings results on Oct. 28, and I wanted to review the figures it released before making a purchase decision. The results were so good, in fact, that the stock shot up by more than 20% following the report.
As the headline of this article suggests, I did end up making the purchase a couple of weeks later. Here are the main reasons I decided to buy Pinterest stock.
Pinterest is adding users to its platform. Image source: Pinterest.
It's simultaneously growing revenue and users
The first thing about Pinterest that intrigued me is its remarkable revenue growth. In its young history as a public company, it grew revenue by 60% in 2018 and 51% in 2019. Profitability has eluded Pinterest so far, but if it continues at this pace of growth, it might only be a matter of time before the benefits of scale allow it to turn the corner.
To highlight the potential profits that arise from scale, competitor Facebook (META -1.12%) generated an operating profit margin of over 30% for seven consecutive years. Admittedly, Facebook is much larger, and Pinterest may never reach that scale, but the comparison shows the potential.
For comparison, Pinterest is still running at a negative operating profit margin and has not yet achieved a full year of positive operating profits. However, this figure has improved sequentially in its second and third quarter of 2020. Moreover, with the company forecasting 60% revenue growth in its fourth and generally most lucrative quarter, it will not be surprising if it reports positive operating profits when it next updates investors on the figure.
Second, I am interested in the rapid pace of user growth. Pinterest increased monthly active users by 37% from the same point a year ago to reach a total of 442 million. The user base's makeup is interesting as well: about 343 million users are from its international market, and about 98 million are from the United States. App users from the U.S. are more sought after by advertisers because of their higher spending power. Pinterest still has room to add more-lucrative U.S. members to its community.
Third, I see the potential for it to close the gap between itself and its competitors to monetize its user base. In the most recent quarter, Pinterest generated $1.03 average revenue per user (ARPU), up 15% from the prior year. In contrast, Facebook reported ARPU of $7.89 in its most recent quarter. Moreover, as of the end of 2019, Pinterest was trailing Facebook, Twitter, and Snap's Snapchat in terms of ARPU. Over time, Pinterest has an opportunity to close the gap between its rivals and increase its own ARPU.
Planning ahead
The position I started was a small one compared to the rest of my portfolio. I plan to add more shares if the company continues to improve in any of those three primary metrics discussed earlier. Additionally, I am prepared to add more to the position if the stock price falls by more than 10% as part of a broad market decline. And I am ready to hold on to my investment in this growth stock for the long term by only investing funds I will not need in the next five years.
