Social media platforms are generally free to join and to use. The companies make money by showing advertisements to people browsing and interacting with the platforms. More users, interacting more often, typically lead to more revenue.
Therefore, social media businesses work on creating innovative features that attract users. My two favorite social media stocks for 2022 have done an excellent job attracting hundreds of millions or billions of people, and keeping them engaged.
Meta Platforms (META 1.21%) boasts over 3.5 billion users across its family of apps including Facebook, Instagram, and WhatsApp. That's more than 300 million more than at the same time last year. Even at its massive scale, Meta is still attracting new users.
As mentioned earlier, its platform is free to join and use, and it makes money by showing advertisements. In Meta's most recent quarter, the average revenue per user (ARPU) it generated was $8.18, up from $6.76 at the same time last year.
Folks who use Meta's family of apps voluntarily provide valuable information like their age, marital status, favorite movies, and more. That increases the price Meta can charge advertisers, because ads can be better targeted.
What's more, Meta holds a type of switching cost that makes it unlikely people will stop visiting. Users typically have a social circle on the platform where they follow their friends and family and those people follow them; that way, they get to see posts made by each other. If you don't log in to your Facebook or Instagram account, you may miss popular posts made by people you care about.
From 2013 to 2020, revenue has increased more than tenfold from $7.9 billion to $86 billion. Meanwhile, earnings per share have compounded at an annual rate of 50% over the last decade.
Like Meta's, Pinterest's (PINS -0.60%) app is free to join and to use. However, Pinterest differs from Meta in its utility. While Meta thrives on encouraging interactions between its users, Pinterest encourages interacting with images created by users.
Viewers can create boards where they save ("pin") images they want to look at again. For instance, one of my Pinterest boards contains photos of Michael Jordan seemingly flying on his way to a slam dunk.
I am one of 444 million monthly active users Pinterest reported in the third quarter. That's up 2 million from last year, but down by 24 million from two quarters ago. Pinterest has been shedding users since economic reopening gained momentum in the middle part of the year.
Still, Pinterest increased ARPU to $1.41 in its most recent quarter ended Sept. 30; that's 37% higher than the same time last year. The company is far behind Meta in ARPU, which presents an opportunity. Pinterest has only recently begun monetizing its international users, and further progress on this front could close the large ARPU gap with Meta.
Pinterest is starting from a smaller base, but is growing revenue rapidly, from $473 million in 2017 to $1.7 billion in 2020. It's still not consistently profitable on the bottom line, but if it keeps growing revenue at that rate it may only be a matter of time.
To make Pinterest more attractive, the stock is down 44% in 2021 and is trading near its lowest price-to-earnings and price- to-cash-flow ratios for the year.
For these reasons, Meta Platforms and Pinterest are my two favorite social media stocks to buy in 2022.