On April 27, image-browsing platform Pinterest (PINS 4.04%) announced a partnership with e-commerce giant Amazon (AMZN 3.43%). Since then, shares of Pinterest have dropped 3% in value -- the market doesn't appear to be impressed at all with the partnership.
When I first found out about Pinterest's partnership with Amazon, I was excited. After all, when you partner with a company valued at $1.3 trillion, good things can happen. But new details have emerged regarding this partnership, and I believe this is even more meaningful for Pinterest's shareholders than I originally realized.
How the Pinterest-Amazon partnership works
Pinterest's platform doesn't have posts; it has "pins." Pins are images uploaded from a device or saved from somewhere online, and users browse these images looking for ideas and inspiration. While browsing pins, users are exposed to image-based advertisements. Displaying these ads is how Pinterest makes money.
Increasingly, Pinterest wants its ads to be "shoppable." Businesses can use the company's tools to create ads that can easily lead to sales. The cool thing about these ads is they look like part of the natural image-browsing experience -- they don't feel like an interruption.
In the past, Pinterest has worked directly with businesses to create ads for the platform. But in April, the company partnered with Amazon to bring in third-party ads for the first time. In other words, the companies displaying ads on Pinterest are Amazon's customers, not Pinterest's customers directly.
Advertising services is now one of Amazon's largest and fastest-growing business segments. In the second quarter of 2023, the company generated nearly $10.7 billion in advertising revenue, which was up 22% year over year. Moreover, it has $41.3 billion in trailing-12-month advertising revenue.
For perspective, Pinterest only has $2.9 billion in trailing-12-month revenue.
Amazon generates advertising revenue when businesses pay to promote their product listings on its marketplace. Now, when businesses pay for this, their listings could be promoted on either Amazon as a promoted listing or on Pinterest as a pin. It requires no additional action on their part.
Why this is huge
The benefits of Pinterest's partnership with Amazon may not be felt right away. The press release said, "The partnership will be a multiquarter implementation, which we expect to begin rolling out later in 2023."
While the effects aren't immediate, the partnership can be an incredible revenue-boosting catalyst for Pinterest for two reasons.
- Consider that Amazon's ad business is already 14 times larger than Pinterest's business. Amazon's is faster-growing. Simply put, Amazon's ad inventory is unquestionably larger than Pinterest's. And that larger supply of ads to Pinterest's platform could boost ad rates -- the price it charges per ad slot.
- Having a higher inventory of ads also increases the potential for Pinterest to show more relevant ads to its users. If ads can become more relevant, they're likely to be more successful. And more successful ads create more demand from advertisers.
The secondary benefit to Pinterest's partnership with Amazon is less obvious but nonetheless significant. Since these ads are from Amazon's customers, Pinterest's profit margins can go up because it's spending less on sales and marketing.
In other words, without the partnership, Pinterest would have to try to convince Amazon merchants to advertise on its platform. But with the partnership, there's no need to convince anyone because it'll happen automatically.
It may be an oversimplification. However, companies that can grow revenue and improve profit margins often make good investments. Pinterest's partnership with Amazon can help in both of these areas. And that's why I think Pinterest stock is a good buy today.
There's a final bullish kicker to consider from Pinterest's partnership with Amazon. Amazon may be its first third-party ad partner, but it's likely not the last. Assuming the rollout is successful, Pinterest plans to onboard additional third-party ad partners in 2024 and beyond.
Granted, Amazon is the biggest fish in the e-commerce ocean. So Pinterest already secured the big deal here. That said, any additional third-party ad deals could have the same positive effects on Pinterest's business by increasing revenue and expanding profit margins.
Therefore, investors certainly don't want to overlook what a partnership with Amazon can truly mean for Pinterest.
