Over the last decade, social networks have gone from a tiny part of the economy to an estimated $61 billion industry, just in the United States. Over the last five years, the U.S. social media industry has grown at a 21.6% rate, led by Facebook (META -1.94%) as it has ascended to a market capitalization of $870 billion. However, while Facebook currently dominates social media, up and comers like Pinterest (PINS 2.46%) are growing faster and are looking to eat into Big Blue's market share. 

Here are a few reasons why Pinterest could be the next social media giant.

A person holding a mobile phone and looking at it.

Image source: Getty Images.

Global appeal

Founded in late 2009, Pinterest is a social platform for lifestyle inspiration. Users go on to the mobile app or website looking for visual inspiration for things such as recipes, home furnishing, or even vacations that they can "pin" to their virtual board and come back and visit later. The platform has a scrolling feed and a search function, which is similar to most other social networks.

At the end of fourth quarter 2020, Pinterest had 459 million monthly active users (MAUs), up 37% year over year. While this is impressive, international MAUs actually grew faster than overall users, up 46% from last year and now accounting for 361 million of Pinterest's 459 million MAUs. International growth is vital for platforms like Pinterest who hope to grow to 1 billion+ users like Facebook, Instagram, or YouTube. In order to do that, you need to scale to more than just the 330 million people who live inside the U.S.

Sustainable monetization

What's appealing about Pinterest compared to other social platforms like Twitter (TWTR) or Snap (SNAP 0.84%) is how it is set up for sustainable monetization. Pinterest is more visual and search-based than these other platforms, making advertisements easier and less intrusive for users. It is also not built on polarizing audiences or exploiting users like other platforms have been alleged of doing (and is why you don't see executives at Senate hearings). Management talks about this in the fourth quarter 2020 letter to shareholders:

Our ability to deliver inspiration and a more positive experience for Pinners requires a dedication to content safety. Throughout the recent election cycle, we invested in making Pinterest a place for lifestyle inspiration, not a place to debate politics or read the news.

All these factors indicate that Pinterest has a symbiotic relationship with its users and advertisers, which means it can keep each stakeholder happy without angering the other. This should make Pinterest's model more sustainable over the long term compared to other social platforms.

Pinterest still has a long runway to grow its monetization efforts as well. Last quarter, the average revenue per user (ARPU) on Pinterest was $1.57, up from $1.22 in the same quarter last year. This is less than Facebook, with a fourth quarter ARPU of $10.14, and even Snap with an ARPU of $3.44. So why is Pinterest lagging in ARPU right now? It comes down to international advertising efforts. It has only been in recent years that Pinterest has started to monetize its international audience. In the fourth quarter, international ARPU was only $0.35, and two years ago it was a measly $0.09. Domestic ARPU, on the other hand, was $5.94 and growing 49% year over year. While international ARPU will likely never get as high as the U.S, this gap should close over time. If this occurs, Pinterest will grow its overall revenue at a high rate for many years to come.

The rise of social commerce

Lastly, Pinterest has opportunities to make money outside of advertising, with its biggest opportunity coming from the burgeoning social commerce industry. As the name implies, social commerce is the process of buying products directly on social media platforms. Instagram launched Shops for Instagram last year as a way for businesses and individuals to offer shopping and checkout features directly on the platform. Pinterest has similar features and now allows users to go into "shop mode" on the platform to only see Pins with shoppable products. According to management, this has led to 20 times growth in product searches on Pinterest since the start of 2020.

Social commerce is already an $89.4 billion industry but is projected to grow to a whopping $605 billion in annual spend within the next seven years. Unless consumer habits radically change from now until then, Pinterest and Instagram are the two platforms, at least in the Western Hemisphere, that are primed to capture this growth because of their visual nature and massive scale. For Pinterest, this will keep users happy by simplifying the buying process by going straight from inspiration to purchase, keep creators/merchants/advertisers happy by giving them more business, and will keep shareholders happy by making Pinterest more money. 

Now about that valuation...

At a market cap of $48 billion, Pinterest has a price-to-sales ratio (P/S) of 28 based on its trailing 12-month sales of $1.69 billion. This is a lot higher than Facebook, which sports a P/S of around 10 and industry-leading operating margins of 30% to 45%, depending on the quarter. It is clear there is a ton to like about Pinterest's prospects as an investor. But if you are considering buying shares, just know that the stock trades at a premium valuation and may see short-term volatility, even if the business continues to do well.