Pinterest (NYSE:PINS) smashed earnings estimates last week. The image-based social network reported 76% year-over-year revenue growth to $705.6 million in the fourth quarter, well ahead of the analyst consensus at $645.6 million. Its bottom-line growth was even more impressive as adjusted net income nearly quadrupled to $294.3 million, giving the company a profit margin of 42% during the seasonally strong fourth quarter. On a per-share basis, adjusted earnings jumped from $0.12 to $0.43, beating estimates that averaged $0.32.
Pinterest's monthly active user base rose 37% over the past year to 459 million, and its guidance called for first-quarter revenue growth in the low 70% range, building on its fourth-quarter momentum. By any reasonable standard, Pinterest's business is on fire. The tech stock's price has more than tripled over the last year, and the company has blown past its own guidance in the last few quarters.
But even after a record performance last year, the best is likely still to come for Pinterest. Here's why:
It has a unique niche
Pinterest is generally considered a social media stock, lumped in with the likes of Facebook (NASDAQ:FB), Twitter, and Snap, but the company is different from the typical social media platform in a number of ways.
First, management says that users, which it calls Pinners, come to Pinterest to work on themselves, rather than connect with other people. That means that it has a different mission than typical social networks like Facebook, which exist to connect people.
It's focused on inspiring Pinners, whether they are looking for ideas for home improvement, fashion, or children's activities. It also means that Pinterest is generally a positive place, and Pinners won't encounter the trolls or hate speech that they might encounter on a platform like Facebook or Twitter. Pinterest also doesn't allow political advertising and downplays political content, helping avoid much of the controversy that's swirled around platforms like Facebook in recent years.
All of this makes Pinterest a unique platform. It means that while the company faces plenty of competition in the broader world of digital advertising, it provides a service that will help it retain and grow its user base, making it more attractive to advertisers. That creates competitive advantages like barriers to entry and network effects that solidify the company's position as a leader in image-based social interaction.
The business model is outstanding
Pinterest's fourth-quarter results offer an alluring example of what the company's business could look like at scale in non-pandemic times even in seasonally weak quarters.
Not many businesses can deliver profit margins of 42%, but such is the beauty of the digital advertising model. The costs to build and maintain Pinterest's platform are relatively fixed, and users generate the content. That means that margins will widen as ad spending grows, which will naturally happen as the user base expands and Pinterest adds more advertising products and tools like automatic bidding.
Pinterest also benefits from the special nature of its platform: Its users want to see ads since they often come to the site with an intent to purchase. That distinguishes it from other social media platforms where ads are generally disruptive, making Pinterest particularly appealing to advertisers.
Facebook may offer the best example of the power of the digital advertising model at scale. In its fourth quarter, the company posted an operating margin of 46%, and its operating income jumped 44% to $12.8 billion, showing how a social media business can deliver massive profit margins and growth at scale. It's worth remembering that Facebook is orders of magnitude larger than Pinterest, so there's plenty of room for the upstart to grow on both the top and bottom lines if it can execute its strategy.
It's constantly improving
Part of Pinterest's success in 2020 owes to new products like automatic bidding on ads, shopping ads, and story pins, and the company has plenty of other new features in store for 2021 and beyond.
In its recent shareholder letter, it outlined several initiatives, including delivering more-inspiring content by investing in video and building a creator ecosystem with story pins. The company also plans on deepening the Pinner experience by engaging and inspiring users.
As for its advertisers, it aims to make it easier for them to succeed on the platform by improving performance-measuring capabilities and expanding sales coverage to all types of advertisers. And management wants to make Pinterest more shoppable by helping businesses list their products on the site.
The company has only just begun monetizing its international business, where the vast majority of its users are, giving it a long runway of growth outside the U.S. It saw strong growth in Western Europe in the fourth quarter and plans to launch its ad product in Latin America in the first half of this year.
The clearest sign that Pinterest still has a lot of monetization upside is its average revenue per user (ARPU). In the fourth quarter, ARPU was $1.57, up 29% from the year before (Facebook posted ARPU of $10.14 in the same period, nearly seven times as high.) As Pinterest introduces more advertising products and builds its ad base, ARPU should naturally move higher.
Pinterest shares are up just modestly since the fourth-quarter earnings report, a sign that high expectations are already priced into the stock. But the company has several tailwinds, including easy comparisons in the first half of the year, its appeal to advertisers, its positive social environment, growth momentum, and unique platform in social media.
Over the coming years, Pinterest's business should only get better.