Why Pinterest Is a Great Artificial Intelligence Stock to Buy in 2021

Artificial intelligence has the potential to dramatically change the world. As many as 70% of companies will adopt some type of AI technology by 2030, potentially boosting economic output by $13 trillion per year, according to research from McKinsey.

And Pinterest (PINS 1.02%) is a great stock to buy for investors looking to cash in on that trend.

The benefit for consumers

Pinterest is the social platform for inspiration. The premise is simple: Users build and curate collections (called boards) of visual media (pins) like images and videos. These boards are organized by topic or theme, and they help users plan projects and visualize their dreams.

Image source: Getty Images

Pins can come from anywhere: other websites, other boards, even from offline sources. Regardless, by grouping hand-selected pins into titled boards, users are providing Pinterest with valuable data. In fact, at the end of last year, users had "saved nearly 300 billion [p]ins across more than six billion boards."

Using that data, Pinterest employs AI algorithms to identify patterns. Over time, this gives the company a deep understanding of its users, the relationship between pins, and each pin's relationship to its board. Ultimately, this allows Pinterest to better engage users with highly relevant content, including links to products they can purchase.

This value proposition has translated into strong growth in monthly active users (MAUs).

Data source: Pinterest SEC filings. MAU figures at year end. CAGR = compound annual growth rate.

What's more, as Pinterest adds new users, the AI algorithms only become more intelligent, which translates into even better recommendations. And the more an individual user engages with Pinterest, the more personalized their experience becomes. In both cases this creates a network effect, and that should make Pinterest an increasingly valuable tool to users over time.

The benefit for marketers

On the other side of the equation, Pinterest has an equally strong value proposition for marketers, one that's also powered by artificial intelligence.

First, Pinterest's increasingly deep understanding of its users means it can help marketers target ads effectively. The latter can create several different types of ads (static images, video, or collections), and Pinterest can deliver those ads to relevant users through their home feed or search results.

Unlike other social platforms, ads on Pinterest tend to feel more organic. Users come to the platform to find new ideas, so rather than detract from the experience, relevant ads can actually help provide inspiration and reduce the friction between finding and buying a product. That's good for marketers -- in fact, according to a study by Neustar, the return on ad spend for retail brands is two times higher on Pinterest compared to other social media.

But Pinterest's position as an inspirational tool has another advantage: It gives the company the ability to predict trends before they become widespread. Each year, the company publishes the Pinterest Predicts report, which uses trends in search data to identify soon-to-be-popular ideas and topics.

For example, the current report indicates that searches for "cloffice ideas" have doubled compared to last year. If you're not familiar with the term, a cloffice is a closet redone as a home office. That data is valuable to marketers, since it can help them tweak ad content to better engage users.

Not surprisingly, Pinterest's AI-powered ability to help marketers succeed has translated into pricing power. The company's gross margin and average revenue per user (ARPU) have both trended upward, an indication that marketers are willing to pay more to reach Pinterest users.

Data source: Pinterest SEC filings. All figures at year end. ARPU = average revenue per user.

A final word

According to eMarketer, digital ad spend reached $332 billion worldwide in 2020, giving Pinterest a massive market opportunity. More importantly, the company's revenue is growing more quickly than that of rivals like Facebook and Twitter. That means Pinterest is gaining market share, and the company's investments in artificial intelligence have played a crucial role in making that possible.

Going forward, as more consumers join Pinterest, its AI-powered platform will collect and learn from the new data they provide, improving its ability to recommend engaging, relevant content. That dynamic should be a powerful growth driver, and it's a good reason to buy some shares of this tech company.