Photo by Dima Solomin on Unsplash

Macroeconomic challenges that slowed digital ad spending across digital advertising platforms sent social media stocks off to a rocky start to the year. Many companies were forced to trim ad budgets due to inflationary pressures and supply-chain issues. Pandemic-related restrictions pushed more people towards e-commerce, which benefited social media companies and the digital advertising sector as a whole. With the reopening of the economy, however, the number of users on online platforms has begun to decline. Furthermore, the Russia-Ukraine war contributed to declining user numbers, causing European advertisers to reduce ad spending.

This, however, does not imply that the online shopping trend is dying. Short-term headwinds continue to worry investors, but e-commerce still has room to grow as the increasing number of first-time online shoppers indicates there is a substantial market share to be captured. Even in developed countries such as the United States and the United Kingdom, e-commerce has not reached maturity, which is evident by the low penetration of e-commerce sales. The Asia-Pacific region, which is home to some of the most populous countries in the world, is just getting started with online shopping with Generation Z leading the way.

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Source: Morgan Stanley

Pinterest Inc. (PINS) is increasing investments in its platform to offer an engaging shopping experience to users. The platform has 433 million monthly active users, and the company is attempting to make a game-changing move by combining its visual discovery engine with e-commerce capabilities. Pinterest already has the largest dataset of human-curated ideas in the world, with 360 billion+ ideas saved by more than 400 million people worldwide each month, offering a massive potential audience for marketers and companies wanting to take their products to the right target market.

With these new e-commerce and interactive features, the company is broadening its userbase to include creators seeking and sharing ideas, as well as shoppers inspired by those ideas. This will assist Pinterest in regaining some momentum from a user growth front on the back of a few quarters of declining active users.  

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Source: Company presentation

The company is also expanding its visual inspiration app into new markets, however, these recent updates have largely gone unnoticed amid pressure on tech stocks.
 

Expanding the ad business with Idea Ads and Paid Partnerships

In addition to the fear of a recession, investors have been alarmed by the increasing competition in the social media industry, in particular resulting from TikTok’s exponential growth. Although Pinterest’s business model is very different from photo-sharing and chat-based platforms, the rise of short-form video content has forced the company to rethink its model to meet the demands of a changing user base. In response to these challenges, Pinterest began a transition into becoming a creator platform last year with the introduction of Idea Pins, which are similar to TikTok's short videos. This Story/Idea Pin supports multiple pages of content, and the company has so far released 150 new features in 37 markets in total.

With the launch of new "Idea Ads" on June 15, Pinterest announced the opening of Story Pin to advertisers. This ad format is intended to provide brands with a way to connect with their target audience on Pinterest. Marketers can use Idea Ads directly, or they can be created in collaboration between a business and a creator. The custom links in Idea Ads will drive traffic to advertisers’ websites or inspire future shopping purchases. Idea Pins can also be boosted with paid promotion to get the content in front of more app users. This new advertising feature is very likely to lead to higher average revenue per user in the future. While there is an increasing number of complaints about the number of ads displayed on social media platforms or when watching video content, Pinterest’s model appears to be working well for advertisers with minimal impact on user experience. The company’s monetization efforts are already paying off and there is a long runway for growth ahead.

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Source: Company presentation

Another new feature is Idea Ads with the 'Paid Partnership' tagging process, which allows creators to earn money from their Pin efforts through brand partnerships. With this tool, creators can disclose and promote their brand partnerships as such Pins include a 'Promoted by' label below the creator's name, as well as links to both the creator's and partner brand's profiles in the app. This will also give brands a way to promote user-generated Idea Pin content. According to Pinterest's tests, this feature is already gaining traction among users as people who saw Idea Ads were 59% more likely to remember that brand, and brand collaborations with creators generate 38% higher brand awareness and 37% higher Pin awareness. More than 30 countries now have access to these new formats and tools, and the company is currently working on introducing these features in many new markets in the next few quarters.
 

Strategic acquisitions to drive growth

Pinterest announced on June 2 that it is acquiring The Yes, an AI-powered shopping platform, as part of its efforts to improve the online shopping experience on its platform. The Yes was founded in 2018 by former Stitch Fix chief operating officer Julie Bornstein. The Yes is a personalized daily shopping feed in which users take a quiz to receive apparel recommendations, and the platform learns about the style of a user over time based on the user's purchase history from hundreds of fashion merchants. This acquisition will support Pinterest in building its shopping efforts, which includes the development of features for both shoppers and retailers. Although the AI-based shopping platform is primarily focused on fashion, Pinterest can utilize its expertise for its other popular categories including home, beauty, and food segments. Because users are moving away from Pinterest's pinboard of images to short-form video content and highly personalized feeds, The Yes's technology can assist Pinterest in making product discovery easier, as the algorithm becomes smarter with users browsing more content. The company expects the deal to close in the second quarter of 2022.
 

International expansion

Pinterest has announced the expansion of its advertising business into Japan, allowing Japanese businesses to run campaigns on its platform which has 8.7 million users in Japan. With this sizeable userbase, Japan is likely to become one of Pinterest's top ten markets in the next couple of years. Active users in Japan have more than doubled since 2018, and are on pace to grow exponentially along with the rising popularity of alternative social media platforms in the country.

The high adoption rate of e-commerce and online shopping in Asian markets including Japan will open doors for Pinterest to achieve higher monetization rates in the next 5 years. The company is also assisting small businesses in partnership with Shopify Inc. (SHOP) to improve its appeal among business owners who are likely to spend on social media advertising.

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Source: Statista

As part of Pinterest’s ongoing European market expansion, the company will be opening a new office in Warsaw. Pinterest claims to have started working in Warsaw after acquiring the video editing app VOCHI in December 2021 and now wants to expand its presence in Warsaw and use it as a key engineering and development center.

A global expansion will help drive the active userbase of the company which has been declining over the last 12 months along with the reopening of the economy. The company has struggled to regain its growth momentum since the end of mobility restrictions, which makes it important to expand into new markets to attract more users and generate new sources of revenue.
 

Takeaway

The development and launch of new features, acquisitions, and global expansion will help accelerate Pinterest's vision of becoming a go-to platform for creators, shoppers, and advertisers. In the next few quarters, Pinterest shareholders should keep an eye on upcoming changes in the business model as the company is planning to revamp its strategy to cater to the changing demands of the new generation of social media users. Pinterest is not cheaply valued, but investing in the company before its monetization strategy yields the expected results and may help growth investors enjoy handsome returns in the long run.