Pinterest Q3 23’ Investment Thesis Update

Executive Summary

Thesis I: Immense Growth Potential from Reengaging Lapsed Users and Attracting New Users

• Record User Growth: Highest user count for any Q2, with an 8% increase to 465 million MAUs.

• Global User Expansion: Consistent growth across various regions, appealing to a diverse global audience.

• Innovative User Engagement Features: Introduction of guided browsing and personalized user journeys.

• AI-Driven Recommender Models: Improved pin recommendations and retention rates.

• Unique Data Utilization Approach: Forward-looking data approach for precision-targeted advertising.

Thesis II: Platform Monetization still has Significant Potential from AdTech Enhancements and Engagement Growth

• ARPU Impacted by International Growth: Decline due to higher proportion of non-US MAUs.

• Strategic Advertising Developments: Increased platform monetization and attraction of a larger pool of advertisers.

• Enhanced Ad Formats and Measurement Tools: Accelerated revenue growth and expanded ad inventory.

• Increased User Engagement Metrics: Higher interaction rates and strategic ad load increase.

• Shoppable Ads Evolution and Success: Significant revenue growth from shoppable ads and partnership with Amazon.

• Travel Catalogs and MDL Innovations: Targeted advertising and effective shopping ads revenue boost.

Thesis III: Massive and Expanding Digital Advertising Global TAM

• Pandemic Impact and Post-Pandemic Landscape: Surge and stabilization in digital ad spend.

• Growth in Social Media and Global Digital Advertising: Predicted resurgence and increased user engagement.

• E-Commerce Market Expansion's Influence: Stabilizing and expanding e-commerce market boosting digital ad spend.

• Economic Indicators Supporting E-Commerce: Positive job and wage growth trends, moderating inflation.

Pinterest's strategic initiatives, continuous innovation, and robust position in the digital advertising sector, although underappreciated in current market valuation, set the stage for substantial growth. The company’s ability to adapt to changing market trends, enhance user engagement, and capitalize on the expanding digital advertising market underscores its potential for notable valuation increases and stock price appreciation.

Thesis I: Immense Growth Potential from Reengaging Lapsed Users and Attracting New Users

Thesis Summary

1. Remarkable Growth in Monthly Active Users

   • Record User Count: Pinterest achieved a record 465 million MAUs in Q2 '23, marking an 8% growth and the highest user count for any Q2.

   • Pandemic User Retention: The platform retained a substantial number of new users acquired during the pandemic, showing effective user engagement strategies.

2. Global User Growth Across Geographic Regions

   • Universal Appeal: Pinterest witnessed consistent user growth across various regions, including Europe and the rest of the world.

   • Geographical Transcendence: The platform's content and utility appealed to a diverse global audience, catering to varied interests and needs.

3. Innovative Feature Introduction for User Engagement

   • Guided Browsing Experience: A new feature was introduced to aid episodic users in revisiting themes and guiding them towards new interests.

   • Personalized User Journey: This innovation led to increased return visits and personalized shopping experiences, enhancing user engagement.

4. Leveraging Advanced AI for Enhanced User Experience

   • AI-Driven Recommender Models: Pinterest's use of advanced AI models significantly improved the relevance of pin recommendations.

   • Propensity to Share Parameter: The integration of a 'propensity to share' metric in AI models enhanced retention rates and re-engaged inactive users.

5. Unique Approach to Data Utilization

   • Future Curation Perspective: Pinterest's AI utilizes unique user data focused on future aspirations, offering highly relevant recommendations.

   • Proactive Engagement Strategy: The platform's forward-looking data approach provides precision-targeted advertising and content suggestions.

Remarkable Growth in Monthly Active Users on Pinterest

In Q2 '23, Pinterest showcased impressive performance by concluding the quarter with a record 465 million Monthly Active Users (MAUs), marking an 8% growth. This surge signifies the fourth consecutive quarter of user increase, underscoring the efficacy of their engagement strategies. Despite some skeptics writing off Pinterest, these figures demonstrate their firm grip on the platform's growth trajectory. The unpredictability of the pandemic made it challenging to forecast such an uptick in the user base. Significantly, this quarter has witnessed the highest user count for any Q2 in Pinterest's history.

This achievement is especially noteworthy because it indicates that the substantial wave of users who flocked to Pinterest during the pandemic have largely remained loyal. To illustrate, consider a scenario where a new user, prompted by pandemic lockdowns, turned to Pinterest for home improvement ideas. Captivated by the vast array of inspirations, they not only executed a series of DIY projects but also continued to explore and pin other interests even post-pandemic. This continued engagement is a testament to Pinterest's ability not just to attract, but also retain users. Furthermore, commendations are due for the business's adeptness at re-engaging a modest number of users who had momentarily drifted away.

Global User Growth Across Geographic Regions

Pinterest experienced a notable surge in user growth across various geographic regions. Both the domestic market and the rest of the world have enjoyed accelerated growth for an impressive five consecutive quarters. Europe, while boasting growth for four straight quarters, saw a slight moderation by a percentage point in Q2 '23. These trends highlight the platform's universal appeal, suggesting that Pinterest resonates with users irrespective of their location. The intrinsic nature of Pinterest, geared towards sparking creativity and prompting action, transcends geographical boundaries. To illustrate, imagine a user in Spain seeking culinary inspiration, and another in Japan looking for minimalist home decor ideas; both find the motivation they need on Pinterest, showcasing its global allure.

Innovative Feature Introduction Boosting User Engagement

During Q2, Pinterest unveiled an innovative feature aimed at bolstering user engagement: a guided browsing experience tailored for episodic users. This feature was meticulously crafted to aid users in revisiting previously explored themes and guiding them towards their subsequent project or interest on the platform. How does it manifest? As users scroll through their home feeds, they now encounter a series of horizontal images that expand upon their demonstrated preferences. The content showcased within these images is dynamically aligned with the user's unique intent.

This newly introduced browsing module is not just a cosmetic enhancement; it's a strategic one. The interactions within this module offer Pinterest invaluable insights into user behavior and preferences. These insights, in turn, empower Pinterest to fine-tune the platform's experience, whether it's catering to users' previous inclinations or introducing them to new areas of interest. Moreover, this module assists in curating a more personalized shopping journey for users.

But the efficacy of this feature isn't just theoretical. Concrete results underline its success, with Pinterest recording a significant surge in return visits since its implementation. To put it in perspective, imagine a user who had previously explored "garden makeover ideas" on Pinterest but hasn't revisited the platform for a while. With this new feature, on their return, they might be presented with related images showcasing garden furniture or plant suggestions, reigniting their interest and leading them to delve deeper into the platform. This is a testament to Pinterest's commitment to continuously enhancing the user journey and ensuring sustained engagement.

Leveraging Advanced AI for Enhanced User Experience 

About a year ago, Pinterest took a bold stride into the realm of next-generation AI capabilities. This allowed the platform to leverage recommender models that were monumental in scale—100 times more substantial than their previous models. By ingeniously fusing their exclusive first-party data with avant-garde AI-driven computer vision and search techniques, Pinterest managed to elevate the perceived relevance of their pin recommendations. The result was remarkable, with the relevance score for recommended pins soaring by nearly 10 points, settling at a commendable 94% compared to the previous year.

Further refining their strategy, Pinterest integrated a 'propensity to share' parameter into their AI recommender models. This innovation focused on promoting content that users exhibited a higher likelihood to share. The ripple effect was profound: it not only enhanced the retention rates of regular users but also breathed life into interactions from users who had previously become inactive. These users showed a heightened inclination to engage with content shared by familiar faces. Such a maneuver by Pinterest is a testament to their proactiveness in identifying and responding to user preferences and behaviors. But this isn't a fleeting success story. Since the underlying technique is rooted in machine learning, its efficacy is bound to amplify over time as it continually processes and learns from new data.

To visualize this, imagine a user receiving a pin recommendation of a DIY craft project, something they've shown interest in before. Now, seeing that this pin was shared by a close friend, the user's likelihood to engage with it increases multifold. Such intricate, data-driven strategies demonstrate Pinterest's commitment to continually refine and elevate the user experience on their platform.

A distinguishing factor in Pinterest's AI prowess is its unparalleled access to unique user data. Contrary to other platforms which mainly rely on users' past behaviors, Pinterest holds a vantage point into users' future aspirations. This forward-looking perspective, termed "future curation," serves as a robust basis for AI-fueled content suggestions and precision-targeted advertising. To contextualize, consider a user pinning ideas for a dream wedding that's two years away. Whereas other platforms might target based on past searches or purchases, Pinterest, tapping into this future-oriented data, can provide highly relevant recommendations, from bridal wear trends to innovative decor ideas, making the platform's engagement strategy incredibly proactive and user-centric.

Thesis II: Platform Monetization still has Significant Potential from AdTech Enhancements and Engagement Growth

Thesis Summary

1. International User Growth Impacting ARPU

   • Decline in Average Revenue Per User (ARPU): ARPU declined due to a higher proportion of non-US Monthly Active Users (MAUs), who contribute less to ARPU compared to US users.

   • Regional Growth: Despite the overall ARPU decline, all regions showed positive growth, with areas like Europe growing faster due to their underdeveloped status.

2. Platform Monetization and Strategic Advertising Developments

   • Increased Platform Monetization: Pinterest's platform monetization reached unprecedented levels, doubling pre-pandemic values and overcoming historical under-monetization.

   • Strategic Advertising Enhancements: Strategic redirection and innovative adtech implementations attracted a larger pool of advertisers, driving up ARPU.

3. Enhanced Ad Product Formats and Measurement Tools

   • Diverse Ad Formats: Introduction of new ad product formats, combined with precise measurement tools, accelerated revenue growth from advertisers utilizing these tools.

   • Value Proposition for Advertisers: The expanded range of ad formats and measurement tools enabled advertisers to optimize campaigns and maximize impact.

4. Significant Increases in User Engagement Metrics

   • Uptick in User Interaction: Sessions, impressions, and saves grew faster than the user growth rate, indicating increased platform utility and user engagement.

   • Strategic Ad Load Increase: The increase in ad load, aligned with user interests, expanded ad inventory without hindering user experience.

5. Evolution and Success of Shoppable Ads

   • Shoppable Ads Integration: The introduction of shoppable ads, including various formats, enhanced the shopping experience on Pinterest and drove significant revenue growth.

   • Amazon Partnership for Shoppable Content: The collaboration with Amazon aims to convert every Pin into a shoppable entity, expanding advertising reach and diversity.

6. Travel Catalogs and Mobile Deep Linking Innovations

   • Travel Catalogs for Targeted Advertising: The new travel catalog format, exemplified by TUI’s successful campaign, offers interactive and detailed travel-related ads.

   • Mobile Deep Linking Product (MDL): MDL targets lower-funnel objectives, proving effective in boosting shopping ads revenue and refining lower funnel offerings.

International User Growth Impacting Average Revenue Per User

The overall Average Revenue Per User (ARPU) experienced a slight decline, a trend primarily driven by the growing proportion of non-US Monthly Active Users (MAUs). Advertising rates in the US are notably higher, so these international users contribute less to ARPU. Yet, when examined regionally, all areas exhibited positive growth. Consistent with past trends, Europe and other global regions outpaced the domestic market in growth. This superior rate of expansion in these areas can be attributed to their underdeveloped status, signifying that their ARPU levels are surging from a relatively lower starting point. To illustrate, imagine a budding Pinterest market like India, where local businesses are just beginning to discover the platform's advertising potential. As these businesses start their advertising journey on Pinterest, they contribute to the overall growth in ARPU, even if the absolute values might be lower than more mature markets like the US.

Platform Monetization and Strategic Advertising Developments

Pinterest's platform monetization has consistently reached unprecedented levels. Despite a minor 1 percent setback affecting revenue growth, it's seen as a transient phase, primarily due to a decline in advertising prices on a cost-per-impression basis. This shift can be attributed to the advertising market's equilibrium between supply and demand, particularly in contrast to the massive growth experienced between 2020 and 2022. Remarkably, the platform's monetization rates have soared to over double their pre-pandemic values, rectifying a historical under-monetization trend. This success stems from the deliberate R&D and strategizing undertaken to enhance the platform's advertising appeal.

Historically, Pinterest prioritized user attraction, often sidelining the alignment of its adtech with advertiser needs. However, a pivotal strategic redirection, combined with innovative tactical implementations, has successfully drawn a larger pool of advertisers in recent years. This has spurred a significant rise in Average Revenue Per User (ARPU). And yet, with the platform still being under-monetized, the potential for ARPU growth remains robust. As the temporary challenges surrounding advertising prices wane, strategic efforts are expected to catalyze a resurgence in ARPU growth. To put this in context, imagine a brand previously hesitant to advertise on Pinterest due to perceived low ROI. With the platform's enhanced ad capabilities, the brand not only commences advertising but also observes a higher engagement rate, exemplifying Pinterest's evolving appeal to advertisers.

Enhanced Ad Product Formats and Measurement Tools Driving Revenue

The release of 3x the number of ad product formats and the introduction of precise measurement solutions have been of immense benefit to advertisers on Pinterest. Significantly, revenue growth from those advertisers who utilize these measurement tools has been markedly faster. This trend bodes well for the platform's future, especially as Pinterest pushes for broader adoption of these tools amongst its clientele.

By curating a robust portfolio that harmoniously integrates diverse ad formats with potent measurement tools, the business is setting the stage for highly effective marketing campaigns. Such a well-rounded portfolio not only draws increased attention from potential advertisers but also establishes a clear value proposition. The capability to transparently showcase the utility of these offerings makes it an even more compelling proposition for advertisers.

For a clearer picture, envision an advertiser debating over the best format to launch a new product ad campaign on Pinterest. Thanks to the platform's expanded range of ad product formats and the available measurement tools, they can now make informed decisions based on real-time metrics, optimizing their campaign for maximum impact. This robust suite of offerings from Pinterest ensures advertisers can tailor their strategies effectively, thereby amplifying their return on investment.

Significant Increases in User Engagement Metrics

Pinterest witnessed a marked uptick in sessions, impressions, and saves, growing at a pace even swifter than its user growth rate. Such behavior underscores the platform's augmented utility, as users are likely to engage more frequently, interact more deeply with content, and spend extended durations (reflected in the increased impressions) only if they discern an enhanced value compared to previous encounters.

Rather than merely coasting on past achievements, Pinterest is proactively driving improvements. The company is investing in understanding its users, coupled with advancing its technological framework, to amplify the platform's utility. As a direct consequence, users reciprocate by visiting more often, interacting more actively, and prolonging their sessions. This heightened engagement not only maintains user activity but also augments the available advertising touchpoints per user, thereby propelling the platform's monetization.

Pinterest has reaped considerable advantages from its whole-page optimization, coupled with marked improvements in the quality and relevance of ads. What's particularly noteworthy is that these enhancements in engagement have been realized during a time when the volume of ads displayed on the platform has surged. This trend emphasizes that when ads are pertinent, even augmented ad displays, including those designed for lower-funnel strategies, can be perceived as valuable content by users. This is especially true for a distinctive platform like Pinterest, where users often have a pronounced commercial intent.

The strategic move to escalate ad load turned out to be a masterstroke, not only expanding the ad inventory available for sale but also serving as a buffer against pricing challenges. Moreover, it underscored an essential lesson for the company's leadership: increasing ad inventory can be viable, provided the ads remain germane to the users. Crucially, the user experience remains unhindered, ensuring that the added ad volume doesn't translate into reduced engagement.

To illustrate, consider a user on Pinterest seeking home decor inspiration. Amidst their search, they encounter an ad for a chic coffee table that aligns perfectly with their vision. Rather than finding the ad intrusive, the user appreciates it as it seamlessly complements their search intent, thereby enhancing their overall browsing experience and underscoring the harmonious integration of ads on the platform.

Evolution and Success of Shoppable Ads on Pinterest

Shoppable ads on Pinterest are designed to provide a seamless shopping experience, with types including single-image Shopping Ads, multi-image Personalized Collections Ads, and mobile-optimized Shop the Look Ads. These ads can be easily set up through Pinterest's self-serve tool, Ads Manager, by promoting items from an existing product feed, thus aiding brands in engaging customers early in their browsing journey for inspiration. Additionally, integrations like Shoppable enable direct purchases from ads, enhancing the transaction experience. Pinterest continually unveils new ad products and e-commerce integrations to enhance shoppability, reflecting its ongoing strategy to bolster the platform's commercial appeal and provide more opportunities for businesses to reach and convert users into customers.

Incorporating shopping directly into Pinterest's core experiences resulted in heightened user engagement with shopping-centric content. This tailored engagement fueled the growth of shopping ad revenues at a rate several times greater than the platform's overall revenue expansion. The fruits of Pinterest's strategic investments in this direction are now becoming evident, signaling a pivotal turn in the platform's monetization journey.

At the heart of this successful transformation is Pinterest's ability to seamlessly cater to both users and advertisers through shopping ads. By tapping into the inherent commercial intent of many of its users, Pinterest is amplifying its utility. Each quarter further cements the platform's growing foothold in this burgeoning advertising sector.

To contextualize, imagine a Pinterest user planning a garden makeover. As they explore ideas, they encounter shopping ads for garden tools and plants that align with their vision. This integration not only streamlines their planning process but also offers advertisers a direct, relevant avenue to reach potential customers. As a result, Pinterest is carving a niche for itself in this high-potential segment, with each quarter marking a step forward in solidifying its dominance.

Pinterest's collaboration with Amazon is a game-changing initiative, opening its doors to third-party advertising demand. This partnership is poised to bolster the platform's shoppable content, ensuring a streamlined and superior purchasing journey for users. Central to this move is Pinterest's vision of converting every Pin into a shoppable entity. The objective is multi-fold: to captivate more advertisers, refine outcomes for current partners, and to amplify the range of shoppable content available to users. Slated for a rollout later in 2023, this collaboration will empower Amazon advertisers to expand their promotional reach into the Pinterest domain, thereby infusing the platform with a more diverse array of brands and products.

Given Pinterest's impressive tally of over 463 million monthly visitors, this partnership holds immense promise. It is anticipated to significantly amplify Pinterest's mission of pairing users exhibiting strong commercial intent with relevant brands, facilitating a smooth transition from mere inspiration to decisive action. This is bound to uplift the overall experience for both users and advertisers. In essence, this partnership reflects a sophisticated progression in Pinterest's monetization blueprint, a strategy the platform has been meticulously crafting and tactically bringing to fruition.

In the recent quarter, Pinterest introduced a novel advertising format – the Travel Catalogs. Tailored specifically for advertisers aiming to connect with users actively engaged in travel planning and execution, this format is more than just a static display. Built on the backbone of Pinterest's advanced product catalog technology, it dynamically transforms each travel listing into an interactive product pin. These pins come alive with a wealth of relevant information, encompassing details such as the hotel's name, pricing, vivid imagery, and detailed descriptions, ensuring users get a holistic understanding of what's on offer.

To bring this concept closer to reality, consider the strategy adopted by TUI, a globally renowned tourism conglomerate headquartered in Germany. Recognizing the potential of Pinterest's travel catalogs, TUI integrated them into their comprehensive advertising strategy, hoping to attract a larger audience to their hotel listings. The outcome? The results from their Q2 campaign were nothing short of impressive. They reported a remarkable six-fold increase in their outbound click-through rate. Moreover, the outbound cost per click plummeted by a whopping 80% compared to figures from their prior conversion campaigns. This success story exemplifies the transformative potential of Pinterest's travel catalogs. By serving users interactive and detailed content right when they're immersed in travel planning, brands like TUI are empowered to drive engagement and conversions in a more cost-effective manner, showcasing the continued innovation and adaptability of Pinterest's advertising tools.

In July, Pinterest unveiled its mobile deep linking product, commonly referred to as MDL, making it widely accessible. This innovative tool primarily targets the lower funnel, an area where Pinterest's ad objectives previously hadn't deeply penetrated. At its core, MDL is designed to cater to retailers who are keen on steering users towards making purchases on their mobile apps. And the results speak volumes. Over the past nine months, MDL has showcased outstanding efficacy, becoming a pivotal catalyst in the upswing of shopping ads revenue.

Building on this momentum, Pinterest plans to incorporate the insights and best practices derived from MDL to refine their lower funnel offerings. One key enhancement slated for the latter half of the year is the introduction of seamless one-click site handoffs. This feature will be particularly beneficial for retailers who either don't operate a standalone app or prefer a direct one-click transition to their website. It grants them the adaptability to opt for the solution that aligns perfectly with their business goals.

These advancements aren't mere incremental upgrades; they're monumental strides in Pinterest's strategic journey. They embody the meticulous, data-informed, and action-centric leadership style of the new CEO, Bill Ready. Under his stewardship, Pinterest is not only identifying gaps but also devising ingenious solutions to fill them, reinforcing its commitment to delivering unparalleled value to both users and advertisers. Imagine a retailer, for instance, who wants to promote a new clothing line. With MDL, they can seamlessly drive Pinterest users directly to their app or website, ensuring a smooth transition from browsing to purchasing, thus enhancing user experience and boosting sales.

Thesis III: Massive and Expanding Digital Advertising Global TAM

Thesis Summary

1. Impact of the Pandemic on Digital Advertising

   • Increased Online Activity and Consumer Spending: The pandemic led to a surge in digital advertising, particularly on social media, fueled by increased online activity and consumer spending.

   • Business Response and Increased CPMs: Businesses shifted their advertising focus to digital channels, intensifying competition and driving up the cost of advertising.

2. Post-Pandemic Digital Advertising Landscape

   • Stabilization of Digital Ad Spend: After the pandemic, there was a moderation in digital ad spend growth, showcasing the resilience of the sector.

   • Continued Importance of Advertising: Despite economic concerns, advertising remained crucial for businesses, ensuring the continued vitality of the digital advertising industry.

3. Growth of Social Media Advertising in the US

   • Projected Growth Rates: EMarketer predicts a resurgence in social media advertising spend in the US, indicating renewed business confidence.

   • Increased User Engagement: The rise in social media users and time spent on these platforms suggests more opportunities for advertisers.

4. Global Digital Ad Spend and Programmatic Advertising Trends

   • Growth in US Digital Ad Spend: US digital ad spend is expected to increase, with programmatic advertising seeing significant growth.

   • International Market Opportunities: Global digital ad spend is also forecasted to grow, surpassing domestic growth and offering opportunities in international markets.

5. Influence of E-Commerce on Digital Advertising

   • E-Commerce Market Expansion: The e-commerce market is stabilizing and expanding, influencing digital ad spend trends.

   • Economic Indicators Supporting E-Commerce: Positive economic trends like job and wage growth, alongside moderating inflation, are expected to bolster e-commerce and, consequently, digital advertising.

Pandemic-Driven Growth and Post-Pandemic Stabilization in Digital Advertising

During the pandemic, the explosive growth in digital advertising, including social media advertising, was a multifaceted response to changing conditions. The widespread lockdowns led to a dramatic increase in online activity, with social media platforms becoming central to many people's daily routines. This was met with an increase in consumer spending power, buoyed by economic stimuli and a pivot in lifestyles that favored digital channels over traditional ones.

Businesses, recognizing the shift in consumer attention to online platforms, notably video streaming and Connected TV (CTV), responded by redirecting their advertising efforts to these digital channels. Social media platforms, with their vast user bases and advanced targeting capabilities, emerged as prime real estate for this redirected ad spend. The competition for consumer attention on these platforms drove up the cost of advertising, as reflected in rising CPMs, thus increasing revenue for the digital advertising ecosystem.

Post-pandemic, the digital ad spend growth began to stabilize, a shift from the pandemic's peak levels. This moderation was partly due to the high benchmark set during the pandemic and a sense of economic caution pervading the market. However, the anticipated significant downturn in ad spend did not materialize, indicating the sector's resilience.

Advertising's intrinsic role as a catalyst for economic activity was reaffirmed as businesses continued to invest in advertising to capture market share and fuel growth. The digital advertising sector, particularly social media advertising, demonstrated robustness against investors' expectations of a significant pullback in ad spend. Now, as the market recovers, the advertising industry, especially the digital and social media segments, is poised to maintain its essential role. Businesses recognize that advertising is a critical tool for market penetration, brand building, and driving sales, ensuring the continued vitality of the advertising industry despite any macroeconomic challenges.

Recovery and Growth Trajectory of Social Media Advertising in the US

The projected growth rates for social media ad spending in the US, as estimated by eMarketer, indicate a significant resurgence in the social media advertising ecosystem following a period of conservatism in 2022. The uptick to a 10% increase in 2023 and consistent growth in subsequent years suggests that businesses are regaining confidence in the efficacy of social media advertising. This confidence is likely bolstered by the overall growth in digital ad spending, which is expected to maintain a steady share of advertising budgets.

The underlying drivers of this growth can be linked to the increase in social media usage and engagement. With the number of users in the US projected to rise from 228 million in 2023 to 240 million in 2026, nearly 70% of the population will be reachable via social media. Moreover, the anticipated rise in the average time spent on social media—from 1.22 hours per day in 2023 to 1.24 hours by 2025, up from just 0.59 hours in the pre-pandemic year of 2019—suggests that users are more immersed in these platforms than ever before.

On a global scale, the expansion of the user base to an estimated 4.12 billion by 2026 underscores the vast potential for international market penetration, especially considering the relative maturity of the US market compared to emerging markets where social media use is still proliferating.

These trends collectively signal robust opportunities for the social media advertising industry. As user numbers swell and engagement deepens, advertisers are presented with an increasingly attractive proposition: the ability to reach a large and growing audience that is spending more time on social platforms. This dynamic environment fosters a fertile ground for innovative advertising strategies, leveraging advanced targeting and analytics to capture attention and drive consumer action. As such, the social media advertising ecosystem is poised not just for growth, but for an evolution in how advertising operates in an increasingly digital world.

Digital Ad Spend and Programmatic Advertising Trends in the US and Globally

The US digital ad spend is projected to rise by 8% in 2023, following an 11% increase in 2022, and then it's expected to reaccelerate back to 11% in both 2024 and 2025. This pattern suggests an ongoing confidence in the digital advertising space despite a temporary slowdown in 2022.

Further breaking down the digital ad spend, we see that programmatic display ad spending is set to increase by 9% in 2023, a notable jump from the 6% growth seen in 2022. The forecast anticipates even stronger growth in subsequent years, with a 13% increase in 2024 and 12% in 2025. This acceleration is indicative of advertisers increasingly valuing the efficiency and targeting precision that programmatic advertising offers, many of which are capabilities inherent to social media platforms.

The forecasts for programmatic video spending are particularly robust, with an expected 16% increase in 2023, marginally down from an 18% increase in 2022. The sustained strong growth at 15% and 13% for 2024 and 2025, respectively, can be partly attributed to the rising expenditures in CTV ad spending, which is expected to grow by 22% in 2022 and 17% in 2024. This trend highlights the growing importance of video content within the digital advertising realm, a domain where social media platforms are increasingly prominent due to their integrated video capabilities and content offerings.

Globally, digital ad spend is forecasted to grow by 10% in 2023, down from 15% in 2022, with a steady pace continuing into 2024 and 2025 at 11% and 10%, respectively. This global growth is expected to surpass domestic growth, with programmatic display internationally projected to see a 13% increase in both 2023 and 2024. The international markets represent a significant opportunity for social media platforms that can cater to diverse global audiences and leverage cross-border digital advertising.

MAGNA's updated forecasts reinforce the narrative of digital dominance, raising the revenue forecast for digital media owners by 9.6% while further downgrading traditional media from -3.2% to -3.6%. This shift reflects a broader trend of ad dollars migrating from traditional channels to digital ones, with social media advertising standing as a key beneficiary of this reallocation.

Incorporating these data points, the social media advertising ecosystem is characterized by robust growth, driven by programmatic efficiencies, the premium on video content, and the expanding global digital footprint. These elements underscore the growing economic significance of social media platforms as pivotal channels for advertising spend.

E-Commerce Market Stability and Influence on Digital Advertising

The global e-commerce market, after experiencing a notable surge in growth, appears to be entering a phase of stability with consistent expansion predicted in the coming years. This sustained growth is shaping the landscape of retail and consequently, influencing digital ad spend trends. With e-commerce sales anticipated to swell by 50% over the next three years, the digital space is becoming even more crucial for retailers.

This expansion is not occurring in isolation. As e-commerce begins to account for a larger slice of the retail pie—rising from 14% pre-pandemic to an estimated 19.5% in recent years—it’s projected to encompass nearly a quarter of all retail sales by 2027. Such growth is not only indicative of the increasing comfort and preference for online shopping among consumers but also underscores the importance of digital visibility for retailers. In this environment, social media platforms become critical for brands seeking to harness this momentum, as they offer targeted and interactive avenues to reach potential customers.

Furthermore, the resilience of e-commerce is mirrored by the enduring growth seen in overall retail sales, which demonstrates the broader economic recovery and consumer confidence. This scenario is bolstered by positive trends in job and wage growth, alongside rising disposable incomes—all of which contribute to a consumer base with the means and propensity to spend.

With inflation beginning to moderate, consumers may feel more inclined to make discretionary purchases, thereby driving retailers to boost their digital advertising efforts to capture this demand. The social media industry, with its advanced targeting capabilities and vast user engagement, stands poised to benefit from this increased ad spend. Retailers and brands are likely to lean heavily on social media advertising to reach consumers who are increasingly spending their time and money online.

In this context, social media platforms are expected to evolve, not just as channels for advertising, but as integral components of the shopping experience, blurring the lines between advertising and direct e-commerce transactions. This symbiotic relationship between retail growth and digital advertising spend presents a fertile ground for the social media industry to innovate and grow in tandem with the e-commerce sector.

Forecast and Valuation

Despite Pinterest's impressive performance in user engagement and platform monetization, the market has not yet fully grasped its immense growth potential. This disconnect between Pinterest's strategic advancements and market perception is rooted in misconceptions about its user base and advertising capabilities. With a record 465 million Monthly Active Users (MAUs) and consistent global growth, Pinterest has proven its universal appeal and retention capacity. Innovations in AI-driven user experiences and strategic advertising developments are propelling user engagement and ARPU.

However, the market still underestimates Pinterest's capacity to leverage these advancements into substantial revenue growth. As the market begins to recognize Pinterest's effective user re-engagement strategies, innovative ad formats, and its strategic positioning in the expanding digital advertising landscape, Pinterest is poised for significant growth, reflecting its true potential and value.