Could Pinterest Become the Next Facebook?

In the last year, Pinterest (PINS -0.52%) added 120 million users to its platform to reach almost half a billion. But what's exciting for investors is that this platform has plenty of growth runway ahead. In this video from Motley Fool Live, recorded on Feb. 5, Fool contributor Brian Feroldi compares this social inspiration platform to its larger social media giant cousin, Facebook. Fool contributors Brian Stoffel and Brian Withers join the discussion and provide additional insight.

Brian Feroldi: Let's compare that to another company in this space, Facebook. So Facebook, the average [revenue per] user in the US, $54. Again, Pinterest, six dollars, and Facebook, $54. There's tremendous amount of room for that number to grow in the United States. Worldwide, so mixing all that together, Facebook up to $10 during the quarter. Again, Pinterest is around a $1.57. That shows me how much room there still is for these numbers to grow considerably, especially if you believe that Pinterest is a more monetizable platform than Facebook. That might be a stretch to say, but I think there's lots of room for this number to grow both domestically and internationally.

Here's the numbers for the full year. Basically, thesis on track from a revenue perspective, thesis on track from a monthly active users perspective, thesis on track from an upgrading leverage perspective, so really great full-year numbers.

Digging a little bit more into the details, I realized there's a ton of words here. What you need to know is that they are trying to introduce new products that make the experience better for pinners. They're introducing products that make you able to tell stories. One of the things that they called out on the platform was they're going to really focus on "how to" videos. They're making a big push into videos. I personally use YouTube all the time for "how to". Like how do I change the air filter on my car, etc. That could be a major growth area of Pinterest, and they're investing accordingly to make it easy for content creators to put up that kind of content. That's pretty exciting.

They're also investing to make it easier for advertisers to succeed. Brian, how about this, helping advertisers read to the customers is essential to our mission. There's the mission word again. They are also focused on making Pinterest far more shoppable. That is a major growth avenue for the company.

So here's the thing on the story pins. They have all kinds of data in the shareholder letter about features that they're pushing out to make it easier for people to take on new boards and to comment on friend posts. I love this, so the shopping on Pinterest. So that in Pinterest, pinnners can now pivot into shop mode across all product categories, leading to a feed of shoppable product pins. All these efforts have resulted in strong growth in product-only searches which have grown by 20x since the beginning of 2020. Product-only searches grew 20x in the period of a year. This is what the power of introducing new tools and features for advertisers is doing. They're clearly having immediate success as they're launching these new features.

They made a great call out here where made.com used their new automatic bidding tool, which traded four times the amount of clicks and 80 percent decrease in cost per click. That is huge ROI if you're an advertiser. When you're allowed to show things like this, it just becomes a no-brainer to advertise on your platform when you can get that ROI on your spending.

They introduced the automatic bidding feature in 2020. Already, this brand new feature in 2020, roughly half of our advertising spend employed automatic bidding. They introduced this feature, in the same year it's already half of total spending on that. They're producing new reports and stuff to make it easier to see what you're doing, and they are going to continue to invest in things like video.

They also had this interesting note right at the top. At the beginning of the year, they produced a predictions report based on what they're seeing happening on their platform to say what trends do they think are going to be really well searched for. They noticed this, 80 percent of their predictions for 2020 came true. Eighty percent! That doesn't speak volumes about the power [laughs] of their platform, that's incredible. They actually just put out a predictions trends [report] for 2021. That was interesting to see.

As for guidance, they basically said that they expect growth revenue in the first quarter to be in the low 70 percent range. It's going to come off of an easy comparison, so that 70 percent growth might not be as exciting as Q4. But man, that's a strong number. Wall Street really liked this report up to five percent today when I took this picture. And on a valuation basis, Pinterest is currently trading about 31 times sales, but only about 100 times next year's earnings estimate. [laughs] What's exciting is that number has actually fallen over time. While the share price is going up, earnings are growing so fast that the evaluation, in my opinion, is pretty darn good. So that's Pinterest.

Brian Stoffel: We're going to run that quote on you. Only 100 times earnings. [laughs] Don't get me wrong.

Brian Feroldi: I'll pay 100 times forward earnings anytime.

Brian Stoffel: I get where you're coming from, I'm just imagining someone 20-years ago listening in on this conversation.

Brian, I'm going to ask a couple of questions that came up in the queue real fast and maybe you can tackle them or we hand it off for Peloton. One is just some basic questions a lot of people had. Pinterest users, they're not the ones who generate the revenue. Can you just explain real quick, who does generate revenue?

Brian Feroldi: Well, Pinterest users are the products just like Facebook users are the product. So the people that are generating the revenue, our brands and advertisers that want to get their product in front of pinners. Exact same business model as Google.

Brian Stoffel: This is just out of curiosity. I'm putting you on the spot. Do you know who does advertise on there? Because I know on Etsy, the people who make the stuff advertise on them more than anything. When we're talking about Pinterest, is it target, is it big brands, is it like made.com like you just showed or? How do we now know?

Brian Feroldi: I believe right now it's a lot of small brands, and I actually think I saw a stat, but I cannot confirm this stat. Pinterest was 30 percent of Etsy traffic. It's that strong of a tie-in between the two. Pinterest often has a direct tie-in to Shopify. There's also a major partnership there. But from my understanding, just like on Facebook, I'm pretty sure that most of the revenues from small and medium-sized businesses are at least a large portion of it. That's my understanding of who is advertising on Pinterest. Big brands are advertising here, I just don't know the exact break out between the two.

Brian Stoffel: All right. Then one more question before we move on because a lot of people want to hear this. It says that,

Yesterday, an analyst on Yahoo! said that for $80 a share for Pinterest, they would need 16 billion monthly active users to justify the evaluation.

Could you explain why would he say that? Obviously, this analyst is bearish.

Brian Feroldi: I have no comment about other people saying silly things. [laughs] Other than to say, I disagree.

Brian Stoffel: To your credit, people were saying that a year ago when this started and what was it trading for a year ago, like $20 a share?

Brian Feroldi: Less.

Brian Stoffel: Less. There you go.

Brian Feroldi: The way I think about Pinterest evaluation is this. The ARPU [average revenue per user] number is the most exciting thing. I think Pinterest can at least 5X its average revenue per user, like at least.

Brian Withers: That would be half of Facebook.

Brian Feroldi: Yeah. It would still be [only] half of Facebook. How many users could this platform get? It just added 120 million in the last year. So they're at just under half a billion. Could they get to a billion? Facebook has three billion. Could Pinterest be one-third as popular as Facebook?

If you can buy that argument, could they double their user base and 5X their average revenue per user? That will be a 10X growth in revenue. Is that realistic? I don't think it's out of the realm of possibility.

Pinterest is a $50 billion [market cap] company. How about this for a comparison? Snapchat, 91 billion. Which platform do you think is more monetizable? Which platform do you think is more niche? If Snapchat is worth 90 billion, I think Pinterest is worth at least 200 billion.

Brian Withers: As they grow that revenue, that's significantly scalable. They're going to drop more to the bottom line.

Brian Feroldi: Their gross margin is 82 percent and rising.

Brian Withers: Yeah, already.

Brian Feroldi: So, bullish. [laughs]

Brian Withers: I couldn't tell, Brian, I'm glad you clarified that.