After a proposed acquisition of Pinterest (PINS -3.07%) for $45 billion by PayPal Holdings (PYPL -2.68%) fell through, both companies have taken the spotlight. After the deal died, there was a discussion over whether or not this acquisition would have been a good mix of two undoubtedly good businesses.
Out of the two companies, however, which one is better? There is no debating that these two companies have immense potential in front of them, but which one is better to invest in today? Two Motley Fool contributors take this question head-on.
Pinterest: A potential multibagger
Jamie Louko (Pinterest): If you're looking for an established company that still has the potential to grow multiples bigger than its current size, Pinterest might be a good place to park cash. Pinterest is a social media company that helps drive inspiration and creativity in people. Many people go to Pinterest looking for something, but don't have an image or item in mind. The users will "know it when they see it," and they are looking to buy the item when they find it. Eighty-nine percent of users have the intent to purchase, which makes advertisements on the platform extremely valuable.
On Pinterest, ads enhance the user experience, whereas ads diminish the experience on other social media platforms. This aspect has resulted in immense success in the third quarter of 2021, where the company's revenue soared 43% to $633 million. The company grew its average revenue per user (ARPU) by 37% to $1.43, which still has tons of room to expand. Meta Platforms' ARPU is nearly $10, and considering the satisfaction of advertisements on Pinterest, it is reasonable to believe that Pinterest could reach that figure over the next five years. Net income grew from negative $94 million in Q3 2020 to positive $94 million in Q3 2021 and it has generated a massive $536 million in free cash flow so far this year.
The main growth avenue for Pinterest is its ARPU expansion, but the company needs to maintain its 444 million monthly active users (MAUs) to fully capitalize on this opportunity. Pinterest has struggled to retain users, losing 7% of users since Q1 2021. If the company continues to lose users, its ARPU expansion would be much less impactful. However, its primary focus should be on ARPU rather than user growth. The company has dropped nearly 50% from its highs, now trading at 13 times sales, so investors would likely capitalize if Pinterest finds success over the coming years. Pinterest's growth potential in ARPU is massive, and if it can be successful, the company could become a multibagger.
PayPal: The safer bet -- and the more exciting growth story
Anders Bylund (PayPal): You know PayPal as a provider of online payment systems and related services. The company processed transactions worth $936 billion in 2020, including $159 billion managed by the rapidly growing mobile payment app Venmo.
2020 was a great year for PayPal but the company is doing even better this year. In the just-reported third quarter of 2021, the total payment volume (TPV) rose 26% year over year to $310 billion while top-line revenue jumped 13% to $6.18 billion. Venmo was the star of the show, boosting its TPV by 36%.
Venmo is going places. The service will soon be available as a payment option for domestic Amazon orders. This partnership is notable because Amazon doesn't even take payments through the standard PayPal service yet.
In the third-quarter earnings call, PayPal CEO Dan Schulman made it clear that his company had been constrained from this type of deal by its contractual obligations to former parent company eBay. Now that eBay is transitioning to another in-house system for managed payments, that relationship has ceased to control PayPal's business options.
So we're looking at a leader in the thriving field of online payment services, recently freed from a stifling eBay relationship, and armed with Venmo in the even hotter mobile payments sub-sector. Compared with Pinterest's stalled user growth and risky all-in reliance on unpredictable ad sales, I'd pick PayPal's rock-solid business every time.
While both companies could become wonderful investments, the stock that you should buy today might differ between investors. While Pinterest has a longer growth runway, it is also inherently riskier than PayPal. For investors who are able to take on more risk, an investment in Pinterest might be wise, but for investors looking to bring some stability to their portfolio while still having a likely chance to beat the market, PayPal might be more enticing.