Pinterest (PINS -0.31%) is the social platform for inspiration. It lets users collect and interact with visual media, helping them discover ideas, plan projects, or learn new things. For instance, you could use Pinterest to find the latest beauty or home décor trends, plan a vacation or party, build a home office, or try a new recipe.

Last year, Pinterest added over 100 million new users, driving revenue growth of 48%. This highlights the company's strong growth strategy, an advantage that should continue to power gains in the digital ad market. Here's what investors should know.

1. Deepening user engagement

To make its platform more useful and deepen user engagement, Pinterest has invested heavily in artificial intelligence and computer vision. These tools help the company find patterns between users and the content they bring to the platform, which allows Pinterest to deliver more relevant content over time.

Digital rocket blasting off, symbolizing explosive growth.

Image source: Getty Images

Pinterest has also focused on adding more inspiration content. Last year, it expanded its offering for creators -- think chefs, professional trainers, fashionistas, and makeup artists. These influencers can now publish story pins, which use images and videos to tell a visual story. This helps creators build an audience, and it engages users with tips from talented chefs, insights from style experts, or ideas from interior decorators.

Most importantly, Pinterest has made its platform more shoppable. Inspiration is great, but Pinterest can better engage users by helping them take action on their inspirations. To that end, Pinterest introduced the shop tab last year, which allows users to search for products they can buy. As a result, the number of users interacting with shoppable content increased 44% in the first quarter of 2020, and that number reached 85% by the end of Q3.

In total, these efforts have powered strong growth in monthly active users (MAUs), particularly in international markets.

Monthly Active Users

Q4 2018

Q4 2020

CAGR

United States

82 million

98 million

9%

International

184 million

361 million

40%

Data source: Pinterest SEC filings. CAGR = compound annual growth rate.

2. Increasing value to marketers

Pinterest has differentiated itself from other social media through its focus on creating a positive, uplifting platform. For instance, it banned political ads in 2020. Users also tend to come to Pinterest for inspiration, meaning they typically don't have a specific product in mind. This makes it an ideal place for marketers to invest ad dollars.

Person browsing Pinterest on a tablet.

Image source: Pinterest

Last year, Pinterest introduced an array of new tools for merchants, including faster catalog uploads, new ad formats and conversion insights, automatic bidding, and improved product tagging.

These changes are already boosting performance. Marketers using the new collections ad format have seen a 6-18% increase in average basket size. And those using automatic bidding saw up to 29% more clicks and 28% more conversions (i.e. products added to users' carts or purchased).

Additionally, Pinterest now allows merchants to transform their profiles into online storefronts that organize in-stock products by category. When users visit a brand's profile, they see personalized product recommendations.

All of these initiatives are designed to help marketers succeed, and they have made Pinterest a more valuable ad platform. As a result, marketers are willing to pay more to reach Pinterest's users, as is evidenced by its growing average revenue per user (ARPU).

Pinterest ARPU

2018

2020

CAGR

United States

$9.01

$15.34

30%

International

$0.25

$0.88

88%

Data source: Pinterest SEC filings. CAGR = compound annual growth rate.

The flywheel effect

Pinterest benefits from a powerful flywheel effect: As the platform becomes more useful, more people will turn to Pinterest for inspiration. That means it will collect more data, powering its AI algorithms to improve the user experience.

At the same time, marketers will have a wider audience and more data for targeted ads, which should drive more brands to advertise on Pinterest. That means more content will be added to the platform, making it even more useful to each user. And that brings us back to the beginning of the flywheel.

In the most recent shareholder letter, management indicated that Pinterest will continue to invest heavily in adding inspirational content, deepening user engagement, supporting marketers, and making Pinterest more shoppable. All of those initiatives should continue to power this flywheel, which should help the company gain market share in the coming years.