Pinterest (PINS 0.79%) and Meta Platforms (META 2.23%) are two very different social media companies. Pinterest, which served 450 million monthly active users (MAUs) at the end of 2022, carved out a niche market with its virtual pinboards for ideas, interests, and hobbies. Meta, the largest social media company in the world, served 3.74 billion people on a monthly basis across its "family" of four main apps: Facebook, Messenger, Instagram, and WhatsApp.

Both stocks hit their all-time highs during the buying frenzy in growth stocks in 2021. But Pinterest and Meta now trade about 70% and 50%, respectively, below those levels. They both spooked the bulls with their macro and company-specific problems, and rising rates exacerbated the pain. Could either of these fallen social media stocks be worth buying again? 

Two people checking their smartphones together.

Image source: Getty Images.

What happened to Pinterest and Meta?

Pinterest and Meta both generate most of their revenue from ads, which are highly exposed to inflation, rising rates, and other macro headwinds. In addition to slower ad spending, both companies were affected by Apple's iOS update in late 2021, which enabled its users to opt out of data tracking features. That change made it difficult for both platforms to craft targeted ads.

Both companies also faced fierce competition from ByteDance's short video platform TikTok, which serves about 150 million MAUs in the U.S. and more than a billion users worldwide. The more time people spent on TikTok, the less frequently they shared ideas on Pinterest or posted fresh content to Facebook and Instagram. TikTok also challenged Pinterest and Instagram in the nascent social shopping market with its shoppable ads.

As those macro and competitive headwinds intensified, Pinterest and Meta faced company-specific challenges. Pinterest had experienced a major growth spurt during the pandemic as new users flocked to its platform to find ideas for online shopping, recipes, DIY projects, and family activities, but those tailwinds dissipated as the lockdowns ended. As a result, Pinterest still serves 28 million fewer MAUs than it did at its peak (of 478 million MAUs) in the first quarter of 2021.

Meta didn't experience a comparable growth spurt during the worst of the pandemic, so it didn't lose any MAUs across its combined family of apps in 2022. But as its core advertising business cooled off, Meta continued to pour billions of dollars into its unprofitable Reality Labs segment, which houses its virtual and augmented reality devices. It also continued to face privacy and antitrust lawsuits from regulators worldwide.

Which company has a brighter future?

Pinterest's revenue rose 9% to $2.8 billion in 2022, compared to its 52% growth in 2021, while analysts expect its revenue to grow 8% in 2023. That stable outlook can be attributed to its rebounding MAUs, which rose 4% in 2022, and its rising average revenues per user (ARPU) in the U.S. and Canada -- which still generate much higher revenues per user than its overseas users. 

However, Pinterest's margins are still being squeezed by higher marketing expenses, more generous subsidies for its top content creators, elevated infrastructure costs, and a lack of pricing power for its ads. That's why its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin plunged from 32% in 2021 to 16% in 2022. On the bright side, analysts expect that pressure to ease and for its adjusted EBITDA margin to rise to 17% in 2023.

They also expect its adjusted earnings to increase 25%. But based on those expectations, Pinterest's stock still looks a bit pricey at 42 times forward earnings.

Meta's revenue dipped 1% to $166.6 billion in 2022, decelerating from its 37% growth in 2021, as its earnings per share plunged 38%. Analysts expect its revenue and earnings to rise 5% and 14%, respectively, in 2023 as it expands Reels to counter TikTok, adjusts its advertising algorithms to fix its iOS issues, and aggressively cuts costs. Based on those estimates, Meta's stock looks reasonably valued at 21 times forward earnings.

Meta's MAUs across its four main apps still rose 4% in 2022, and it should remain the world's top social networking company for the foreseeable future. But this year, it needs to prove that its VR and AR investments are worthwhile as they compress its operating margins, monetize Reels without cannibalizing its higher-revenue News Feed ads, and navigate the regulatory headwinds. All those uncertainties could drive investors toward more stable tech stocks in this wobbly market.

But this year, a potential ban on TikTok in the U.S. remains a wild card for both Pinterest and Meta. That's all speculation for now, but an outright ban could certainly convince investors to pay a higher premium for both social media stocks.

The better buy: Meta

Pinterest's growth rates are gradually stabilizing, but they could also peak in the near future as it saturates its niche market. Its stock is also arguably too pricey relative to its industry peers. Meta faces a lot of near-term challenges, but its diversification, stability, and lower valuation all make it a more compelling investment than Pinterest right now.