Want to multiply your money over the long term? Look no further than growth stocks. These cutting-edge businesses increase revenue and earnings faster than average, making them an ideal means of earning supersize returns. One recent example: Pinterest (PINS -0.64%), which has already skyrocketed around 230% since its IPO in 2019. Let's explore why its unique business model -- and potential acquisition -- could set investors up for even more success.
A different kind of social media platform
The social media space is under growing regulatory pressure over privacy concerns, misinformation, and abusive speech. Giants like Facebook and Twitter face the brunt of the backlash because they focus on peer-to-peer interactions and personal data.
Pinterest is different. Unlike rival platforms, its users communicate through pictures instead of words and tend to gravitate toward subjects like home decor and food instead of politics.
Image source: Getty Images.
So far, that seems to have been a formula for success. Second-quarter revenue soared 125% year over year to $613 million, driven by an increase in global average revenue per user, which jumped 89% to $1.32. Pinterest boasts 454 million monthly active users, who often use the platform to learn more about items they are interested in purchasing.
Pinterest's shopping-motivated user base makes it well-suited to "social commerce" -- which is essentially e-commerce that happens directly on a social media platform. Pinterest's economic moat could make the platform more attractive to advertisers and potential acquirers hoping to tap into the social commerce opportunity. This area is expected to grow at a 28% compound annual growth rate to $3.4 trillion by 2028, according to data from Statista.
What would a PayPal acquisition mean?
In the past week, there have been news reports that Pinterest is in talks to be acquired by fintech giant PayPal. The deal would value Pinterest at $39 billion -- equivalent to $70 per share and a big premium over the stock's closing price of $56 per share before the reports came out.
Analysts say that PayPal aims to compete with Shopify, which has begun blending e-commerce and fintech through its partnership with Affirm, a buy-now-pay-later platform that will provide point-of-sale financing for its checkout service. A Pinterest acquisition could help PayPal expand outside of the payments niche to become a bigger player in social commerce and advertising.
While the buyout is far from certain (both companies have declined to comment), it has been good news so far for Pinterest's investors. The rumors have already led to a 13% rally in the stock and could encourage the market to take the company's social commerce opportunity more seriously.
It's not too late to bet on Pinterest
With a forward-price-to-earnings multiple of just 41, Pinterest is valued higher than the S&P 500's average of 31. But that's a fair premium considering its rapid growth rate and burgeoning profitability. Plus, the company's e-commerce-friendly business model gives it a strong economic moat, and buyout interest suggests the shares may not stay this cheap for long.
