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Talking up plans to use artificial intelligence was once a sure-fire way for companies to boost their share prices. But while AI can push up valuations, it can also inflate expectations — to a painful degree.
Consider the diverging fortunes of Pinterest and Snap. The former is a digital scrapbook where users create mood boards, with a market capitalisation of $17bn. The latter, roughly the same size, owns the disappearing photo and video app Snapchat. Both are beaten-up stocks fighting for digital advertising dollars against much bigger social media companies. Both have leaned heavily on AI for growth.
But that is where the similarities end. Pinterest’s shares fell 20 per cent this week despite solid third-quarter revenue and user growth. Those for Snap enjoyed a 25 per cent one-day jump on the back of an agreement to integrate Perplexity’s AI-powered answer engine into Snapchat for a year, in return for cash and equity amounting to $400mn.
Pinterest may be the better long-term bet. True, Snap has a hotline into the brains of young consumers, which may explain why Perplexity sees value in its 943mn monthly active users. But Pinterest may be more directly monetisable because its 600mn monthly users are more likely to arrive in the mood for shopping. In its most recent quarter, revenue rose 17 per cent to top $1bn, compared to only 10 per cent at Snapchat.
Snapchat users, of course, are catnip to companies seeking to place ads in front of an impressionable audience. Snap managed to get the equivalent of over $3 per user out of advertisers in its latest quarter, more than Pinterest. That suggests that the scrapbooking outfit has room to grow further.
Pinterest’s most pressing problem is not AI. Rather it is the lack of diversity in its advertiser base. Only 15 per cent of its revenue comes from small and mid-market companies. Instead it is reliant on the advertising spending of large retailers like Amazon, Wayfair and Walmart. These have pulled back amid tariff-related uncertainty.
But these are short term problems, and Pinterest is working on winning over more small and mid-sized advertisers. Even incremental gains on this front could move the dial. The stock also has the benefit of being cheap, trading at less than 14 times forward earnings, against Snap’s 23 times. Those looking for AI-investment inspiration should stick a pin in it.