Is Google really trying to buy Pinterest?

If it is, it's likely motivated by Pinterest's unique ability to predict consumer behavior.

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This article was originally published on All figures quoted in US dollars unless otherwise stated.

Google's parent company Alphabet Inc. (NASDAQ: GOOG)(NASDAQ: GOOGL) may be considering an acquisition of image-browsing platform Pinterest (NYSE: PINS). And that's because Pinterest possesses something extremely valuable that Alphabet would definitely like to have in a changing advertising economy.

Don't be fooled by a stock price that's down more than 70% from its all-time high. Here's the case for Pinterest and its potential suitor.

Where did this crazy rumor even come from?

Alphabet CEO Sundar Pichai spoke at the Code Conference earlier this month. He talked about many things going on with the company, including developments in the advertising market and concerns over artificial intelligence. Late in the talk, however, the interviewer turned the conversation toward mergers and acquisitions (M&A).

When asked if Pinterest was an acquisition target, Pichai stammered, "Look, I can't comment on a few, on any M&A deals." He then smiled sheepishly at the interviewer's suggestion that he could comment if he wanted to do so.

Perhaps Pichai was simply uncomfortable with the entire interview and struggled for an answer regarding Pinterest for this reason. However, the interviewer had just asked Pichai the same question regarding Twitter, Inc.(NYSE: TWTR), which he seemingly answered with ease. Alphabet isn't looking to buy Twitter, he said. The drama unfolding with Elon Musk has Pichai simply watching with "popcorn."

Pichai answered the question on acquiring Twitter. He didn't with Pinterest. And that leads some to believe that Alphabet has indeed reached out to Pinterest about a potential acquisition. 

Why Pinterest is a valuable acquisition target

Pichai's comments at the Code Conference is just circumstantial evidence. However, it wouldn't be the first time a big tech company would be interested in buying out Pinterest. PayPal Holdings, Inc.(NASDAQ: PYPL) was reportedly trying to buy Pinterest for $45 billion last year. PayPal's market capitalisation was around $300 billion at the time compared to Pinterest's then market cap of around $35 billion.

Both market caps have fallen mightily -- PayPal is down to about $105 billion whereas Pinterest is worth about $16 billion. And when it comes to Pinterest, its stock has been crushed because of slumping user metrics. It was once believed that Pinterest could potentially attract billions of users like Meta Platforms, Inc.(NASDAQ: META). However, the company peaked at 478 million monthly active users way back in the first quarter of 2021 and has since steadily declined to where it is today at just 433 million monthly active users.

On the surface, Pinterest's relevance is dwindling, which hardly seems like a platform worthy of PayPal and Alphabet's attention. However, Pinterest has steadily increased its monetization, going from $1.04 in average revenue per active user (ARPU) in Q1 2021 to $1.54 in Q2 2022. That's substantial.

Here's what Alphabet and PayPal are likely interested in: Pinterest has steadily increased its monetization thanks to its truly unique perspectives and insights into consumer behaviors. Year after year, the company proves it knows what people want with its annual Pinterest Predicts report -- the report was proven to be 80% correct in 2021.

For Alphabet's part, it generates most of its revenue through advertising. But the game is changing for advertising stocks. Consumers are increasingly concerned about privacy, and governments are regulating more. For this reason, Alphabet intends to do away with third-party cookies in 2024. But that risks making its ads less effective, and that would consequently lead to lower ad rates. 

Acquiring Pinterest and its consumer insights could dramatically help it remain more effective at advertising while also doing away with tracking. 

For PayPal, investors often forget it has a merchant side of its business -- 35 million active merchant accounts as of the second quarter of 2022, up from 32 million in the same quarter of 2021. Part of the company's strategy is to provide data on consumer intent to merchants so they can better know what to prioritize. This is exactly what Pinterest could have provided had the deal gone through.

Pinterest is still a valuable company

In the end, we don't know for sure if Alphabet is really intent on acquiring Pinterest or whether we'll never hear rumblings of this rumor again. However, I believe we have seen that Pinterest's business has value even if it's struggled to create value for shareholders since going public in 2019.

That said, I believe Pinterest is still a stock worth buying today despite its user struggles. Its ARPU growth demonstrates its value to advertisers, likely due to its perspectives on consumer trends. That could make Pinterest an even more attractive platform if the global economy goes into a recession; advertisers would likely decrease spending overall and concentrate spending on platforms where returns are the best. And Pinterest would be a top contender for those concentrated dollars.

This article was originally published on All figures quoted in US dollars unless otherwise stated.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Jon Quast has positions in PayPal Holdings and Pinterest. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet (A shares), Alphabet (C shares), Meta Platforms, Inc., PayPal Holdings, Pinterest, and Twitter. The Motley Fool Australia has recommended Alphabet (A shares), Alphabet (C shares), Meta Platforms, Inc., PayPal Holdings, and Pinterest. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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