Shares of Pinterest (PINS 2.42%) have fallen 68% from the previous peak, but the image-based social media app is reporting much better growth than a year ago.

Accelerating revenue growth and prospects for an improving advertising market have pushed the stock up 17% this year, but Pinterest is not out of the woods yet. Its strategy to launch shoppable ads on its platform puts it in more direct competition with Meta Platforms' Instagram, but Pinterest has one advantage that could drive more growth for investors.

Pinterest has the perfect user demographic for advertisers

Despite a soft advertising market, Pinterest reported two consecutive quarters of accelerating top-line growth in the first and second quarters of 2023. Wall Street analysts expect revenue to increase by 8% for the full year before accelerating to 15% next year.

These numbers are not quite as strong as estimates for Facebook owner Meta Platforms, but Pinterest is growing much faster than Snap, which is expected to report a slight decline in full-year revenue. Pinterest CFO Julia Donnelly credits the company's improving growth to its "highly attractive user demographics, brand-safe environment, and strong return on ad spend."

Indeed, Pinterest's biggest advantage is its image-centric platform. It attracts people who are already interested in buying something, which makes shoppable ads a perfect fit for its user demographic. It appears well positioned for profitable growth once the advertising market recovers.

One area showing great potential for the company is shoppable ads. Earlier this year, Pinterest partnered with Amazon Ads to bring more brands in front of Pinterest users.

In September, Pinterest announced a new type of ad format called direct links. This format allows a user to land on a retailer's website in just one click, reducing the time to make a purchase. After launching this new ad product, analysts at Piper Sandler found that Pinterest's outbound clicks tripled over August, indicating Pinterest could see further revenue acceleration in the near term.

More importantly, the firm's data shows that the cost per click is also down about 60%, which sets up a strong year of growth in 2024 as more advertisers adopt direct links to boost their return on investment.

What could limit the stock's upside?

The downside for investors is that Pinterest is spending a lot of money to drive growth. Over the last three years, operating expenses have increased substantially, which has kept it from reporting a consistent profit.

PINS Net Income (Quarterly) Chart

PINS data by YCharts. TTM = trailing 12 months.

Another negative is that Pinterest may face increasing competition that requires it to keep spending on new discovery and ad technology to stay ahead. For example, Meta's Instagram has nearly three times the number of users and has made substantial headway in turning into a viable shopping platform. Nearly half of Instagram users said they shopped the app weekly in 2021.

Also, Pinterest is not the cheapest social media stock right now. On a forward price-to-earnings basis, Pinterest trades at a multiple of 30, which is more expensive than Meta Platforms' multiple of 24.

The bull case is getting stronger

Pinterest's higher valuation reflects investor expectations for superior growth over the long term versus its competitors. Over the last three years, Pinterest has grown revenue much faster than Meta Platforms, although Meta is on pace to report better growth in 2023.

PINS Revenue (Quarterly) Chart

Data by YCharts.

Despite the negatives, Pinterest's accelerating revenue shows it is headed in a positive direction. The ad market that Pinterest is pursuing is valued at $550 billion. Management believes it can deliver 20%-plus annualized revenue growth. If Pinterest reaches that target, the stock will rise substantially over the next decade.

All in all, the long-term upside could far outweigh the downside, so it might be worth it to start a small position in the stock as part of a diversified portfolio.