Activist company

Opinion: Buy Pinterest, not Twitter – seven reasons the company will outperform

The stocks social media complex was weak primarily due to two threats.

There is an economic downturn and advertisers reduce spending when growth falters. Next, Apple’s AAPL,
+1.21%
privacy initiatives make it more difficult for ads to be targeted using information gathered by tracking individuals.

Top search and social sites like Alphabet GOOGL,
+1.92%
and Meta META,
+2.88%
look attractive in this hindsight, in my opinion. I own both. But what about the next level? Two popular discounted names at this level are Pinterest PINS,
+10.08%
and Twitter TWTR,
-1.03%.
Here I say buy Pinterest in the weak, 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 that “Pinners” go to the site with a specific intention: to find things and buy them – from clothes, jewelry and art to home improvement items. In the process, they share ideas – that’s the social angle.

Pinners “tend to be in-market consumers with strong commercial intent,” as Pinterest CFO Todd Morgenfeld puts it. As such, “pinners are a highly sought-after audience,” says Baird analyst Colin Sebastian.

Twitter, on the other hand, is a place where people go to exchange ideas, learn, report virtue, chat, and troll. The average user might visit the site 20 times a day, according to one estimate. But let’s be honest: most of the time it’s just to check how many followers they have. It’s rarely for shopping or looking for ideas on what to buy.

This distinction is essential for advertisers. They pay a lot more to put ads in front of people who are shopping, or better yet, about to make a purchase. Influencing their thinking at this stage is more likely to lead to a profitable outcome for advertisers.

In contrast, advertisers use Twitter to build overall brand awareness. Doug Anmuth, an analyst at JP Morgan, estimates that 85% of Twitter’s ad revenue is brand-based. This is a weakness compared to Pinterest. Advertisers pay less for it. And it’s the type of ad spend that’s most likely to be cut in times of economic uncertainty and a downturn, like now, Anmuth says.

2. Pinterest is better at navigating the changing online advertising landscape

Apple has recently shaken up the world of online advertising by strengthening the privacy of its customers. Apple now has its customers register to have their activities tracked online. Previously, by default, almost everyone was tracked by marketers developing profiles for targeted advertising. Previously, Apple customers had to actively opt out. Due to the change in acceptance, fewer people are being followed now. This undermines the effectiveness of ad targeting on social media sites, which hurts Twitter more than Pinterest. Here’s why.

Since Pinterest has an image and text search engine and can track Pinners’ browsing and shopping habits, it can always create its own “social graph” of users – for targeting advertising.

“Its ad sales remain less dependent on Apple’s data on user behavior outside of the Pinterest app,” said Ali Mogharabi, who covers Pinterest and Twitter for Morningstar.

Pinterest’s search engine and social network make Pinners a “rich target audience for advertisers,” says Sebastian de Baird. “Twitter will remain a very challenging business as it navigates the cyclically contracting advertising market,” he said.

JP Morgan’s Anmuth says Apple’s policy change had little impact on Pinterest. “We believe Pinterest can build a strong advertising platform as it grows its user base and improves monetization,” he said.

Sure, Twitter analyzes tweets and user interactions to help marketers target ads. But Pinterest is better at tracking the business interests of its users. Thus, its user profiles are more useful to advertisers.

3. Pinterest is a mini-turnaround under new management

Pinterest just got a new CEO named Bill Ready. On paper, at least, he seems like the right person for the job. He ran Alphabet’s business division before joining Pinterest. He also brings high-level leadership experience on PayPal PYPL payment sites,
+2.43%,
Venmo and Braintree. He has yet to reveal his full plan, but he will soon.

“We expect Bill Ready to emerge from 2022 with a refocused business that reverts to the significant margin expansion seen in 2020 and 2021,” said Goldman Sachs analyst Eric Sheridan.

By contrast, Twitter has recently been hit by the loss of several key executives like product manager Kayvon Beykpour and revenue product manager Bruce Falck, as well as high employee turnover, notes Jefferies analyst Brent. Thill. The loss of key executives and the continued distraction of Elon Musk’s embittered takeover “will massively disrupt the advertising industry,” Thill wrote in a recent note. This, combined with economic weakness and “unclear strategic direction,” puts 2023 revenue at “significant risk,” Thill says.

4. Pinterest has an activist

The involvement of an activist in a company is not always what it is supposed to be. They may push for short-term changes like layoffs that create a short-term pop they use to get out, but do little to improve long-term prospects. But Pinterest activist Elliott Management may be different, in the opinion of Ken Squire of 13D Activist Fund DDDAX,
+0.69%,
because he has a good record in technology.

By contrast, Twitter doesn’t have an activist investor in the mix. He seemed to have a form of one – or at least a champion – in Tesla’s TSLA,
-0.46%
Elon Musk. But he backed out of his plans to buy Twitter, either because he suspects the number of fake accounts is too high or because he now thinks his bid price was too high and he can. trade down. Either way, it’s not a good reflection on Twitter’s business.

5. Pinterest has two clear growth paths

First, it can tap into a large market by becoming more of a direct e-commerce platform offering business products and a payment system.

“We believe the combination of a highly engaged, action-oriented audience with an inherently commercial platform provides Pinterest with a realistic opportunity to tap into the global trillion-dollar e-commerce market,” says Sebastian. of Baird.

Next, Pinterest has plenty of room to make more money from its international user base. Its international audience makes up about 70% of its user base, but 5% of its revenue, Sebastian notes. Pinterest is already starting. Global average revenue per user grew 80% year-over-year in the second quarter, albeit from a small base. It launched advertising in Japan in the second quarter, and in July it expanded to Chile, Argentina and Colombia.

By contrast, it’s hard to see comparable growth prospects on Twitter.

6. Insider buying

Pinterest just saw a big $5 million insider buy by CEO Bill Ready at $22.47. Twitter insiders have been doing nothing but selling — literally for years. Twitter insiders, including the chief financial officer, have sold $3.87 million worth of stock so far this year. Last year they sold for $28.38 million (again the CFO was a big seller). And Twitter insiders have been selling for all of 2018-20.

7. Founder-Led Company

I like investing in founder-led companies because they often outperform. Pinterest was co-founded in 2010 by Google’s Ben Silbermann, former Meta product designer Evan Sharp and venture capitalist Paul Sciarra. Silbermann is now executive chairman and Sharp is a member of the board of directors. On the other hand, the founders of Twitter have severed official ties with the company.

How can I be wrong

Thill at Jefferies believes Musk is using the issue of fake Twitter accounts and a lawsuit challenging the purchase agreement to get a lower price.

“We believe the most likely outcome of the Musk lawsuit is a renegotiation of the purchase below the original $54.20 offer,” he said.

Since a legal appeal from Musk challenging any short-term court ruling in Twitter’s favor could drag on for years, Twitter has an incentive to accept a lower offer. No one knows what that price might be, but it could be significantly higher than the current stock price. This would cause Twitter shares to outperform Pinterest shares in the short term.

A twist in the Musk-Twitter saga is a whistleblower’s complaint alleging a lack of security within the social media company. The complaint from former Twitter security chief Peiter Zatko mirrors some of Musk’s allegations and could potentially trigger investigations into the company.

Michael Brush is a columnist for MarketWatch. At the time of publication, it has GOOGL, META and PYPL. Brush suggested GOOGL, META and PYPL in his stock market newsletter, Brush Up on Stocks. Follow him on Twitter @mbrushstocks.