According to eMarketer, 81% of internet users worldwide use social media each month. Notably, that figure is up from 78% in 2019 as a result of pandemic-driven digitization.
Not surprisingly, that trend has been a tailwind for social giants like Facebook (FB 1.09%) and challengers like Pinterest (PINS +1.19%). And given the enormity of the digital ad market, both of these tech companies should continue to grow in the years ahead.
But which stock is the better buy?
What we know about Facebook
Facebook operates several social media platforms, including Facebook, Instagram, Messenger, and WhatsApp. It generates the vast majority of its revenue through the sale of ad space across those platforms, as well as on third-party apps and websites.
Image source: Getty Images.
Last year, as the pandemic drove people online, growth in monthly active people (MAP) accelerated. At the same time, 79% of MAP were also daily active people (DAP), up from 78% in 2019 and 77% in 2018. This indicates an uptick in engagement over time.
In the first quarter of 2021, 3.45 billion people used one of Facebook's platforms on a monthly basis. Notably, the pandemic-driven increases in engagement continued to hold, as 79% of monthly users also signed in daily. And the average revenue per person (ARPP) increased 29% to $7.75 for the quarter.
In total, revenue jumped 48% year over year in Q1, driven by a 12% increase in the number of ads delivered and a 30% increase in the price per ad. That represents a meaningful acceleration in top-line growth compared to the company's performance in recent years.
|
Metric |
2018 |
Q1 2021 (TTM) |
CAGR |
|---|---|---|---|
|
Monthly Active People |
2.64 billion |
3.45 billion |
13% |
|
Revenue |
$55.84 billion |
$94.4 billion |
26% |
|
Free Cash Flow |
$15.4 billion |
$24.2 billion |
22% |
Data source: Facebook SEC filings. TTM = trailing-12-months. CAGR = compound annual growth rate.
While Facebook's growth has been solid, investors should note that revenue has increased more quickly than free cash flow. This reflects Facebook's weakening operating margin, which has fallen from 45% to 40% over that period.
Even so, Facebook is the leading social media platform worldwide. Over 2.7 billion people use at least one of its products every day -- that's roughly one-third of the globe's population. That incredible scale has helped it capture 25% of the U.S. digital ad market. Only Alphabet's Google has taken more market share.
Going forward, if Facebook can avoid legal trouble, I think it still has room to grow.
What we know about Pinterest
Pinterest takes a different approach to social media. Rather than connecting friends and family, it's a tool for inspiration, planning, and action. Pinterest has also gone to great lengths to build a positive environment for its users. Most social platforms can't make the same claim.
Image source: Getty Images.
Pinterest's growth strategy has focused on bringing more inspiring and shoppable content to its platform. For instance, it doubled down on video in 2020, enabling brands to engage consumers with dynamic stories and tutorials. Pinterest also made it possible to switch to shop mode from search, and it introduced the verified merchant program, helping consumers identify trusted sellers. In both cases, this simplifies the transition from inspiration to action, increasing value for consumers.
Those efforts also drove record growth in 2020: Pinterest added over 100 million monthly active users, and during Q4 it saw a sixfold increase in the number of businesses using shopping ads on its platform. That boosted average revenue per user (ARPU) to $4.26, up 12% from the prior year. Notably, Facebook's ARPP was $32.03 in 2020, more than seven times higher than Pinterest's.
In general, Pinterest has delivered solid financial results over the last few years.
|
Metric |
2018 |
Q1 2021 (TTM) |
CAGR |
|---|---|---|---|
|
Monthly Active Users |
265 million |
478 million |
30% |
|
Revenue |
$755.9 million |
$1.9 billion |
51% |
|
Free Cash Flow |
($82.6 million) |
$230.4 million |
N/A |
Data source: Pinterest SEC filings. TTM = trailing-12-months. CAGR = compound annual growth rate.
As a caveat, investors should be encouraged by the company's strong performance in 2020, but they should also expect growth to slow in 2021. As the pandemic abates, people will probably spend less time online.
Even so, Pinterest has plenty of room to grow its business, especially in international markets. Given its execution so far, I think the future looks bright for this social media company.
The verdict
Facebook has achieved incredible scale, dwarfing Pinterest. It's also much more profitable in terms of absolute dollars. That makes Facebook a formidable competitor.
However, Pinterest has also managed to differentiate itself. Its platform is often a safer environment for brands, since ads are less likely to appear beside hateful content. Additionally, people come to Pinterest looking for inspiration -- in other words, they come to Pinterest with the intent to shop. That makes it a better place for marketers to spend ad dollars.
Finally, Pinterest is growing more quickly and its ARPU is several times smaller than Facebook's ARPP. That means Pinterest has plenty of room to expand, which should create more upside for long-term investors. That's why Pinterest is the better buy.
