After the pandemic-driven drop in digital ad spend last April, Pinterest (PINS 2.22%) saw steady improvement throughout the remainder of 2020. And while many consumers were boycotting other social media platforms, Pinterest was rolling out new products and features that strengthened engagement on its platform.

Not surprisingly, Pinterest outperformed the S&P 500 by a wide margin with shares surging 270% in the last 12 months. Even so, the company's growth story is still in its early chapters, and Pinterest looks like a long-term winner. Here are three reasons the stock is a buy.

A Pinterest user browses a board on their iPad.

Image source: Pinterest.

1. Pinterest has a great growth strategy

Pinterest is the social platform for inspiration, designed to help users visualize their dreams and turn them into reality. The company's growth strategy plays into this purpose, focusing on making Pinterest more shoppable and scaling its ad business.

So far, management has done an excellent job executing on these initiatives. In 2020, despite the difficult environment, Pinterest underwent an incredible transformation -- and I say that as a shareholder and a user. The company made it easier for merchants to upload product catalogs to the platform, added new ad formats, upgraded analytics tools for marketers, and introduced numerous new ways to shop. For instance, users can take a picture of anything they see in the real world, and Pinterest can help them find out where to buy it (or where to find something similar).

In April 2020, the number of shoppable Pins (visual media posts) on Pinterest was 2.5 times higher than the previous year, driving 2.3 times more traffic to retailers. And 44% more users were engaging with shoppable content compared to the prior year. Moreover, that metric accelerated as the pandemic dragged on. In the second and third quarters of fiscal 2020, the number of users interacting with shoppable content increased 85%. In other words, Pinterest's growth strategy is working.

2. More people are using Pinterest

As a result of this effective strategy, monthly active users (MAUs) have grown quickly both in the United States and internationally. In fact, growth actually accelerated in 2020, despite a massive deceleration in the global digital ad market.

Metric

2019

2020

Change

U.S. MAUs

88 million

98 million

11%

International MAUs

247 million

361 million

46%

Global MAUs

335 million

459 million

37%

Data source: Pinterest SEC filings.

This metric is particularly important for investors to follow. Pinterest's ability to add and engage users is directly linked to its ability to bring brands and ad dollars to its platform. And the company's continued expansion during a tumultuous year is a very positive sign for the future.

 3. Pinterest's revenue per user is rising

While other social media platforms are increasingly characterized by divisive content, Pinterest has distinguished itself as a platform for inspiration, productivity, and positive action.

That feel-good vibe, paired with Pinterest's expanding user base, helped drive greater ad spend to the platform in 2020 as brands sought to distance themselves from other social media platforms. As a result, Pinterest's average revenue per user (ARPU) increased both in the United States and internationally, an indication that the company's user base is becoming more valuable to marketers around the world.

Metric

2019

2020

Change

U.S. ARPU

$12.07

$15.34

27%

International ARPU

$0.54

$0.88

62%

Global ARPU

$3.81

$4.26

12%

Data source: Pinterest SEC filings.

Put simply, not only are more people using Pinterest, but the company is also more effectively monetizing users on its platform. That twofold dynamic powered 48% revenue growth in 2020, and the company is guiding for more than 70% growth in the first quarter of the new fiscal year.

A final word

Pinterest is still an unprofitable company and trades at a pricey 30 times sales. While this actually compares favorably to social media peer Snap (36 times sales), it's much higher than industry stalwarts like Facebook (nine times sales). All things considered, this valuation doesn't look that outrageous, though, given the company's long-term growth prospects.

Moreover, Pinterest has clearly differentiated itself from competing social media platforms. And as the company continues to improve the shopping experience for users and the platform's appeal to marketers, Pinterest is well positioned to capture market share and reward shareholders. For what it's worth, this is one of my highest-conviction holdings, and I have no plans sell.