Social Media Frenzy

by Overheard Wall Street
  • Intro
  • History
  • Universe
  • Pinterest
  • Conclusion/Recommendation

Intro

It’s hard to imagine a life without scrolling and double-tapping, but social media platforms have taken our lives by storm over the past 20 years. 

The apps and platforms have become big businesses. With almost 75% of Americans using social media, advertisers have tapped into the space. Social media ad spending is expected to reach $100 billion in 2023. 

Facebook was the first dominant player in the space, but Instagram became one of the few platforms to match Zuck’s success (Rip Vine). But TikTok is the new kid on the block, and all the other platforms have been trying to catch up since Covid. 

TikTok has raised big questions about the role of social media in Americans’ lives, as well as privacy and national security concerns.

2022 was a rough year for social media stocks - Facebook’s parent company shifted its focus to the metaverse, confusing investors in the process. Companies like Snapchat lost billions of dollars, and every week a new headline came out hinting at TikTok’s eventual ban. 

It raises the question - is there a social media company with a clear, focused path to profitability in 2023?

History

Social media became ingrained in our lives at a seemingly exponential pace.

Here's a brief history of social media in the United States from 2005 to now:
  • 2005: Social media started to take off with the launch of YouTube, a video-sharing platform that allows users to upload, share and view videos, took place. Additionally, Facebook became available to everyone with a registered email address, and it started to gain popularity among college students.
  • 2006: Twitter was launched. It was initially created as an internal communication tool for a podcasting company.
  • 2007: Facebook launched the News Feed feature, which displays updates from friends, family, and pages users follow on a user's homepage.
  • 2008: The hashtag was created and started to be used on Twitter as a way to categorize tweets.
  • 2009: Facebook introduced the ability to "like" comments and integrated with other websites to allow users to log in to those sites using their Facebook credentials.
  • 2010: Instagram was launched. It became particularly popular among younger audiences and artists.
  • 2011: Google+ was launched as a social network competing with Facebook. It never achieved the same level of popularity.
  • 2012: Pinterest, a social bookmarking platform that allows users to save and share images, was launched.
  • 2013: Snapchat, a photo and video messaging app, was launched. It gained significant popularity among younger audiences.
  • 2014: Facebook acquired WhatsApp, a messaging app, for $19 billion.
  • 2015: Facebook introduced live video streaming, allowing users to broadcast video in real-time.
  • 2019: TikTok, a video-sharing app, gained massive popularity among younger audiences.
  • 2020: The COVID-19 pandemic led to an increase in social media use.

Universe

Facebook and Twitter have stuck around since the beginning, but here are some other key players in the space:
  • Meta ($META)
    • Facebook was rebranded to Meta in 2021. Meta also owns Instagram, which has over 2 billion users. Meta’s stock took a hit in 2022 after the company shifted its focus on the metaverse, but it has rebounded 49% YTD.
  • Snap, Inc. ($SNAP)
    • Snap, Inc. owns Snapchat, which allows you to instantly share photos and videos with friends. The company went public in 2017 and has 750 million active users
  • Pinterest ($PINS)
    • Pinterest is a social media platform that allows users to discover, save, and share images and videos on virtual pinboards. Users can search for specific topics or browse through curated collections of images and videos, called "pins." Pinterest went public in 2019 and has 450 million active users.
  • ByteDance (not publicly traded)
    • ByteDance is the parent company of TikTok. Despite a $250 billion valuation, ByteDance is not publicly traded. Some speculate that, given privacy concerns, the U.S. government could force ByteDance to an American company.
  • Twitter (privately-held)
    • Twitter was taken private by Elon Musk in late 2022 at a $44 billion valuation, but the company’s revenue has fallen by around 40% since.
  • Reddit (privately-held, may IPO this year)
    • Reddit is a social media platform that allows users to submit content and vote on other users' content. Users can create and join "subreddits," which are communities centered around specific topics or interests. Reddit plans to IPO in late 2023.

Catalyst: M&A Activity

Social media companies often try and acquire other companies they perceive as threats. One of the most noticeable deals was Facebook's acquisition of Instagram for $1 billion in April 2012.

At the time of the acquisition, Instagram was a rapidly growing photo-sharing app with a loyal user base, while Facebook was primarily a social networking site.

Mark Zuckerberg, Facebook's CEO, recognized Instagram's potential as a threat to Facebook's dominance in mobile social networking, especially among younger users. By acquiring Instagram, Facebook could not only eliminate a potential rival but also gain access to a younger demographic and expand its mobile reach.

Overall, Facebook's acquisition of Instagram was a strategic move that allowed Facebook to expand its user base, strengthen its mobile presence, and increase its advertising capabilities, all while neutralizing a growing competitor in the social media space. Its acquisition for only $1 billion looks like a steal in hindsight.

Watch out for social media companies trying to acquire competitors. This angle could be especially interesting if TikTok is forced to sell itself to an American company, or if the next revolutionary app comes along. 

Industry Bulls & Bears

Given how widespread social media has become, many Americans have an appetite to invest in the industry. Here are some key reasons to consider investing in the space: 
  1. Large user base: Social media platforms have billions of active users, providing an enormous potential market for advertisers, which is the primary source of revenue for social media companies.
  2. Strong brand recognition: Companies like Facebook, Instagram, and Snapchat are well-known and recognized worldwide. This can translate into user loyalty and trust, which may lead to long-term growth.
  3. Advertising revenue growth: Social media companies generate most of their revenue from advertising, and this revenue stream has been consistently growing year-over-year. As social media continues to play an increasingly important role in people's lives, the demand for advertising on these platforms is likely to increase.
  4. Innovation and adaptability: Successful social media companies are continually innovating and adapting to changing trends and technologies to keep their users engaged. Companies that are able to stay ahead of the curve can potentially experience long-term growth.
  5. Data-driven business models: Social media companies collect vast amounts of data on their users, which can be leveraged to deliver targeted advertising and other personalized services. This data can also be used to inform business decisions and optimize operations.
  6. Diversification: Some social media companies, like Facebook, have diversified their revenue streams by acquiring other companies such as WhatsApp and Oculus VR, which could provide additional growth opportunities.

Reasons not to Invest
  1. Dependence on Advertising: Social media companies rely heavily on advertising revenue to generate profits. Any shift in advertising trends or a significant decrease in user engagement could result in a decline in revenue.
  2. High Valuation: Social media companies are often valued very highly, which means that their stock prices may be overinflated. This can make it difficult for investors to make a profit, particularly if the company's growth prospects do not match the high valuation.
  3. Intense Competition: The social media space is highly competitive, with new companies emerging all the time. Established companies must continue to innovate and adapt to remain relevant, which can be difficult and costly.
  4. Regulatory Risks: Social media companies are subject to regulation, particularly in areas such as data privacy and content moderation. Changes to regulations or new legislation can have a significant impact on a company's operations and profitability.
  5. Public Image: Social media companies have come under fire in recent years for their handling of user data, as well as their role in spreading misinformation and hate speech. Negative public perception can harm a company's brand and result in a decline in user engagement.

Pinterest ($PINS)

Pinterest is a social media platform that allows users to discover, save, and share images and videos on virtual pinboards. It was founded in 2010. 

Pinterest's business strategy revolves around advertising and e-commerce. The platform allows businesses to create accounts, showcase their products or services, and drive traffic to their websites. 

Over the years, Pinterest has evolved and expanded its offerings. In 2017, it introduced Lens, an AI-powered visual search tool that allows users to take a photo of an object and find similar products on the platform. In 2018, it launched Shop the Look, which allows users to buy products directly from pins.

Pinterest is unique because it acts more like a search engine and seamlessly bridges social media and e-commerce.

Pinterest seeks to uplift its members and inspire them. But Pinterest also provides accessible purchasing opportunities for its user base. For example, a user looking for apartment decoration ideas could view what others have done and directly purchase furniture and decor.

Pinterest’s algorithm became a selling point, though other apps like TikTok and Instagram have developed their own. 

Here are some key differentiating factors that could make investors bullish on Pinterest:

1. Strong/Positive Brand
  • Pinterest's success lies in its intentional focus on positivity and creativity, which has earned it a loyal user base and high customer satisfaction. By providing a visual discovery tool for users to curate their own collections of inspiring images, Pinterest fosters a sense of ownership and emotional connection among its users.
  • Pinterest users are therefore more likely to stick around long-term and Pinterest is one of the few social media companies to not be embattled in scandal.
  • Creating value for customers is the key to success in business. Pinterest excels at this by inspiring users to improve their lives, which makes them receptive to advertising. Emotional reactions to ads matter more than their content, and Pinterest's users are primed to be inspired.

2. Unique “Moat”
  • Pinterest's strong competitive advantage lies in its unique position in the market. Unlike other social media platforms, Pinterest does not aim to connect people with one another. Instead, it serves as a discovery engine for users to find inspiration and ideas.
  • This distinction makes Pinterest not just different but incomparable to other social media platforms like Twitter and Snapchat. 

3. High-Spending User Base
  • Pinterest’s user base is highly engaged and motivated to discover and purchase products, which makes it an attractive advertising destination. 
  • Pinterest’s target audience includes American moms (who typically make up 70-80% of a household’s purchasing decisions) as well as millennials, who are starting families and making numerous purchasing decisions. The loyalty of these active Pinterest users is expected to continue throughout their lives, as the platform has the most content, the best algorithm, and the strongest brand. 
  • The platform seeks to reduce friction in the purchasing process by taking users directly to the product detail page on the merchant's app. Pinterest has great potential to capitalize on users' shopping behavior, and these strategies show promising results in turning that potential into tangible business growth.

4. Growth Potential
  • Pinterest's user base continues to grow steadily with a 4% YoY increase in Monthly Active Users (MAUs) reaching 450 million, out of which 80% of impressions and revenue come from mobile app users. 
  • The fastest-growing cohort for Pinterest is Gen Z, with double-digit growth in the fourth quarter, and this group is also driving more video content on the platform. Pinterest can leverage this opportunity to increase engagement among its users and attract more advertisers by focusing on video content and targeting Gen Z.

Reasons Not To Invest
  1. Dependence on advertising revenue: Like many social media companies, Pinterest generates the majority of its revenue through advertising. This makes Pinterest especially vulnerable to market downturns.
  2. Profitability: While Pinterest didn’t break a profit until 2021, the company regressed in 2022 and posted negative net income.
  3. Competition: Pinterest’s algorithm used to be a selling point, but other social media companies are trying to get in on the action. Look for companies Pinterest competes with for ad revenue, such as Meta and Google, to do the same.  
  4. Reliance on SEOs: Many Pinterest users have purchased items by searching on Google Images, and tweaks in the SEO algorithm can hinder Pinterest’s growth.

Conclusion/Recommendation

After a year of negative headlines and a disappointing performance in the social media industry, some investors are beginning to feel disenchanted with the sector. However, Pinterest could prove to be a breath of fresh air for these investors, with its unique focus on visual discovery and its recent revenue growth.

Unlike its competitors, Pinterest has a clear and concise goal: to inspire its users with creative ideas and give them the tools to turn those ideas into reality. Plus, with its unique business model of allowing users to purchase items directly from ‘pins,’ Pinterest is not just inspiring creativity, it's also generating revenue.

Let's compare this to the chaos of Meta, which seems to be lost in a sea of distractions and endless scandals. Or Snapchat, which may have a youthful appeal, but is still struggling to turn a profit.

So why invest in Pinterest? Simple: it's a savvy business model that's already proving its worth. With a steadily growing user base and increasing ad revenue, Pinterest is showing that it's not just a flash in the pan - it's here to stay.

Pinterest is down 69% from its highs, but if it can survive Big Tech’s trainwreck of 2022, it may be a good value pick in the long run.

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