In light of recent attacks on Facebook stemming from a flurry of accusations that the company is choosing profits over the well-being of its users, it might be smart to look into other social media companies to invest in.
Unlike Facebook, Both Nextdoor and Pinterest (PINS -1.55%) have incentives that are aligned with their users, they're growing quickly, and they still have a large market opportunity ahead of them. Both companies could become leaders in their respective fields over the next 10 years, and getting in now should pay off for long-term investors.
Image source: Getty Images.
Nextdoor
Though Nextdoor is still a private company, it is currently in the process of merging with Khosla Ventures Acquisition Co. II (KVSB), a special purpose acquisition company. The deal is expected to close by the end of this year, and Nextdoor should then list on the New York Stock Exchange under the ticker symbol KIND when it begins trading.
In a recent study conducted by Nextdoor, 61% of Americans said it's more important to build connections in the neighborhood than outside of their community, and Nextdoor wants to serve as the tool that can help build them. The company makes money from advertising and in-app purchases from Nextdoor Finds -- a marketplace filled with listings for local goods and services.
But what separates Nextdoor from Facebook is how it allows the people who share a neighborhood to better connect with each other. The ads on Nextdoor are aligned with this mission as they promote local businesses, from mom-and-pop stores to the nearest location of nationwide brands, to help build an active community.
The company's network effects are extremely strong: As more people within a community join Nextdoor, it gives their neighbors more of a reason to join, and this cycle makes advertising through the platform more powerful.
In the second quarter of 2021, Nextdoor's revenue grew 66% year over year to $45.8 million. Total neighbors -- or users on the platform -- increased 17% to 63 million, while weekly active users increased 5% to 29 million. This strong user base represents 33% of all U.S. households, so the key to Nextdoor's growth is not just new users but how the company monetizes them. Though average revenue per weekly active user (ARPU) grew 58% during the quarter, it still came in at just $1.57, well below other social media platforms like Facebook, leaving plenty of room for expansion.
And the company is taking steps to increase both its target user base and its ARPU to fuel the top line. To expand its ARPU, the company is making it easier for advertisers to target specific neighborhoods -- creating seven new tools to enhance its offering in 2021 alone. That makes Nextdoor more valuable to advertisers, and to grow its user base overall, the company is pushing into other communities like churches and schools.
But while the company has established an impressive user base across the U.S., the company still has a tall mountain to climb on its path to profitability. Nextdoor's net income margin in the second quarter was negative 58%, and the broad footprint the company has already established in U.S. households means user growth will be tougher to come by in its home market, leaving increased user monetization as the primary lever for growth. Investors should closely track the ARPU metric as Nextdoor prepares for its market debut, but it has a unique offering worth following moving forward.
Pinterest allows users to visually discover what they're looking for but might not have the words to describe. This idea that users will "know it when they see it" is what allows the social media company to be an attractive tool for users to find inspiration in fashion, cooking, interior design, and more. And as people turn to Pinterest, its advertising partners are lined up to serve users' needs.
Unlike other social media platforms, Pinterest users are much more receptive to advertising, which aligns the company's success with user satisfaction. This alignment has led to strong top-line growth. In the second quarter, revenue was up 125% year over year to $613 million. ARPU has been growing quickly as well -- up 89% to $1.32 -- while active users reached 454 million.
Pinterest's major growth opportunity is in international markets. The company already has 91 million monthly active users (MAUs) in the U.S., a number that declined 5% year over year in the second quarter. International MAUs, however, jumped 13% to 363 million, and Pinterest has a major opportunity to grow its international ARPU, which increased 163% in the second quarter but still came in at just $0.36. If Pinterest can lifts its international ARPU closer to U.S. levels ($5.08), the company would see tremendous revenue growth.
Given its recent trajectory and the large market that lies ahead of it, Pinterest stock trades at a pricey 15 times sales. The company's potential to grow its global user base and corresponding ARPU is attractive, but the market's expectations are very high.
Both Nextdoor and Pinterest are enhancing the lives of their users, which cannot be said about all companies in this industry. Paired with their unique abilities to bring together communities and inspire users, these are my two favorite social media stocks to buy right now.
