The social-media complex of stocks has been weak mainly because of two threats.
There’s an economic downturn, and advertisers cut back when growth weakens. Next, Apple’s
privacy initiatives make it harder to target ads using intelligence gathered by tracking people.
Top-tier search and social sites like Alphabet
look attractive in this pullback, in my view. I own both. But what about the next tier down? Two popular, discounted names at this level are Pinterest
Here, I say buy Pinterest in the weakness, and not Twitter.
Here are seven reasons why.
1. Pinterest is more attractive to advertisers
Pinterest is a mix of search, social and sales. Analysts describe it as an “idea discovery” platform. Translated, this means “Pinners” go to the site with a specific intent: To search for stuff and buy it — anything from clothes, jewelry and art, to home-remodeling items. In the process, they share ideas — that’s the social angle.
Pinners “tend to be in-market consumers with high commercial intent,” is how Pinterest CFO Todd Morgenfeld puts it. As such, “pinners are a highly sought-after audience,” says Baird analyst Colin Sebastian.
Twitter, in contrast, is a place where people go to exchange ideas, learn, virtue-signal, argue and troll. The average user may visit the site 20 times a day, per one estimate. But let’s be honest: A lot of the times it’s just to check how many followers they have. It’s rarely to shop, or look for ideas about what to purchase.
This distinction is key for advertisers. They pay a lot more to put ads in front of people shopping, or better yet, about to make a purchase. Influencing their thinking at this point is more likely to lead to a profitable outcome for the advertisers.
In contrast, advertisers use Twitter to build general brand awareness. J.P. Morgan analyst Doug Anmuth estimates 85% of Twitter’s ad revenue is brand-based. That’s a weakness, compared to Pinterest. Advertisers pay less for this. And it is the type of ad spending that’s more likely to be cut in uncertain economic times and downturns, like now, says Anmuth.
2. Pinterest is better at navigating the shifting online ad-scape
Apple recently threw the online-advertising world into turmoil by stepping up the privacy of its customers. Apple now has its customers opt in to having their activities tracked online. Previously, by default, nearly everyone was tracked by marketers developing profiles for targeted advertising. In the old days, Apple customers had to actively opt out. Because of the change to opt in, fewer people are tracked now. This harms the effectiveness of targeting ads at social media sites, which hurts Twitter more than Pinterest. Here’s why.
Since Pinterest has an image and text search engine and it can track the browsing and purchasing patterns of Pinners, it can still create its own “social graph” of users — for ad targeting.
“Its ad sales remain less dependent on Apple’s data regarding user behavior outside of the Pinterest app,” says Ali Mogharabi, who covers Pinterest and Twitter for Morningstar.
Pinterest’s search engine plus social network combo make Pinners a “target-rich audience for advertisers,” says Baird’s Sebastian. “Twitter will remain a very challenged company as it navigates the cyclically contracting ad market,” he says.
J.P Morgan’s Anmuth says Apple’s policy change has had little impact on Pinterest. “We believe Pinterest can build a strong ad platform as it grows its user base and improves monetization,” he says.
True, Twitter analyzes tweets and user interactions to help marketers target ads. But Pinterest is better at tracking the commercial interests of its users. So, its user profiles are more useful to advertisers.
3. Pinterest is a mini-turnaround under fresh management
Pinterest just got a new CEO named Bill Ready. On paper, at least, he seems like the right person for the job. He led the commerce division at Alphabet before coming to Pinterest. He also brings top leadership experience at the payment sites PayPal
Venmo and Braintree. He hasn’t revealed his full plan yet, but he will soon.
“We expect Bill Ready will emerge from 2022 with a re-focused company that returns to the sizable margin expansion seen during 2020 and 2021,” says Goldman Sachs analyst Eric Sheridan.
In contrast, Twitter has recently been hit by the loss of several key leaders like head of product Kayvon Beykpour and revenue product lead Bruce Falck, as well as overall high employee turnover, notes Jefferies analyst Brent Thill. The loss of key executives, and the ongoing distraction of the soured Elon Musk buyout “will massively disrupt the advertising business,” Thill wrote in a recent note. This, combined with economic weakness and an “unclear strategic direction,” puts 2023 revenue at “significant risk,” says Thill.
4. Pinterest has an activist
Activist involvement in a company is not always all it’s cracked up to be. They can lobby for short-term changes like layoffs that create a near-term pop they use to exit, but do little to improve long-term prospects. But Pinterest activist Elliott Management may be different, in the view of Ken Squire of 13D Activist Fund
because it has a good record in technology.
In contrast, Twitter has no activist investor in the mix. It seemed to have a form of one — or at least a champion — in Tesla’s
Elon Musk. But he’s backed away from his intent to buy Twitter, either because he suspects the number of fake accounts is too high, or he now thinks his offer price was too high and he can negotiate it down. Either way, not a good reflection on Twitter’s business.
5. Pinterest has two clear avenues of growth
First, it can tap into a big market by becoming more of a straight-out e-commerce platform featuring company products and a payments system.
“We believe the combination of a highly engaged and action-minded audience with an inherently commercial platform provides Pinterest with a realistic opportunity to tap into the trillion-dollar global e-commerce market,” says Baird’s Sebastian.
Next, Pinterest has a lot of room to earn more money off its international user base. Its international audience accounts for roughly 70% of its user base, but a 5% of revenues, notes Sebastian. Pinterest is already getting started. International average revenue per user grew 80% year over year in the second quarter, albeit off a small base. It launched advertising in Japan in the second quarter, and in July it expanded into Chile, Argentina and Colombia.
In contrast, it’s hard to see comparable growth prospects at Twitter.
6. Insider buying
Pinterest just saw a big $5 million insider purchase by CEO Bill Ready at $22.47. Twitter insiders have done nothing but sell — literally for years. Twitter insiders, including the CFO, sold $3.87 million worth of stock so far this year. Last year, they sold $28.38 million worth (again, the CFO was a big seller). And Twitter insiders did nothing but sell for all of 2018-2020.
7. Founder-run firm
I like to invest in founder-run companies because they often outperform. Pinterest was co-founded in 2010 by Ben Silbermann from Google, former Meta product designer Evan Sharp and venture capitalist Paul Sciarra. Silbermann is now executive chairman and Sharp is on the board. In contrast, Twitter’s founders have severed official ties with the company.
How I might be wrong
Thill, at Jefferies, thinks Musk is using the Twitter fake-account issue and a lawsuit challenging the purchase agreement to get a lower deal price.
“We believe the most likely outcome of the Musk lawsuit is a renegotiation of the purchase below the initial $54.20 bid,” he says.
Since a Musk legal appeal challenging any near-term court decision favoring Twitter could drag on for years, Twitter has an incentive to accept a lower bid. No one knows what that price might be, but it could be substantially above the current stock price. That would make Twitter stock outperform Pinterest shares in the near term.
A twist in the Musk-Twitter saga is a whistleblower’s complaint alleging lax security at the social-media company. Former Twitter security executive Peiter Zatko’s complaint mirrors some of Musk’s allegations and may potentially set off investigations of the company.
Michael Brush is a columnist for MarketWatch. At the time of publication, he owned GOOGL, META and PYPL. Brush has suggested GOOGL, META and PYPL in his stock newsletter, Brush Up on Stocks. Follow him on Twitter @mbrushstocks.