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Put $1,000 Into This Stock to Avoid a Second Crash

By Jon Quast – Updated Oct 1, 2020 at 10:44AM

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The threat of a market downturn shouldn't keep you on the sidelines. But if you're scared, consider buying this low-risk, high-reward, and cash-rich company.

There's two things you should know from the start. First, since 1928, the stock market has gone up roughly two years out of every three. Second, no one can predict which year will be a loser. Therefore, the most logical way for investors to play the game is to bet the market will go up every year. Sure, this will occasionally be wrong, but it'll be the correct prediction more often than not.

We've already had one stock market crash in 2020, and it's possible we could have another one in the next year. But I would advocate against trying to pick when the crash will come (see point No. 2). Investors should regularly look to add to their portfolios whether the market is up or down -- and $1,000 is a good start.

However, if you're still worried about a second crash, consider buying a stock with a favorable balance between risk and reward. Pinterest (PINS -2.75%) is one company that fits the bill.

The Pinterest home screen displayed on a tablet device.

Image source: Pinterest.

The reward

With $1.22 billion in trailing 12-month revenue, Pinterest is already a big business. But there are three reasons I believe revenue growth is reaching an inflection point.

First, Pinterest has a big user-growth opportunity. The company currently has over 416 million monthly active users around the world, which is still far below other top platforms like Facebook and Instagram. User growth had been slowing, but it reaccelerated in the second quarter of 2020 because of the coronavirus pandemic. Second-quarter user growth came in at 39%.

This is a wonderful opportunity for Pinterest. It's still too early to know if these new users will stick around once life fully returns to normal, but if they do, the accelerated pandemic growth will help get Pinterest to a much larger user base in short order.

Second, Pinterest's monetization should accelerate in a hurry. Besides the increased revenue that comes with user growth, average revenue per user (ARPU) is poised to soar going forward. The company makes money by displaying ads, but fewer companies advertised during the coronavirus lockdowns. Global ARPU plummeted 21% year over year as a result, down to a measly $0.70 in the second quarter.

However, the pullback in ad spending was short lived. During the earnings call, management said it expects third-quarter revenue to be up more than 30% from the third quarter of 2019. And Pinterest doesn't offer political ads, so the growth isn't election related. Therefore, this growth may extend beyond 2020.

Third, Pinterest is developing new use cases, including e-commerce. Businesses love the engagement they're getting from Pinterest's platform, as evidenced by their increased usage. In the second quarter, merchants uploaded their catalogs directly to Pinterest 350% more than the first quarter. And in the first half of 2020, Pinterest users have performed product-only searches eight times as much as they did in the first half of 2019. 

In short, Pinterest is quickly developing into an e-commerce enabler -- a different use case with significant tailwinds.

A scale weighing risk and reward is drawn on a chalkboard.

Image source: Getty Images.

The risk

Share-based compensation is an ongoing issue for Pinterest. Young companies often attempt to attract top talent by offering stock incentives. For Pinterest, it mostly issues this compensation in its research and development department. Over the last 12 months, the company has awarded $386 million in share-based compensation, accounting for 96% of its net losses during that time span.

Since stock-based compensation is a non-cash charge, it only affects the bottom line on paper. But in a practical sense, it can still be a negative for the company. For one, it dilutes shareholder value when new shares are issued. Pinterest currently has around six million unissued shares reserved for this -- and nearly 43 million outstanding stock options as of June 30. And the company might need to increase pay to employees once share-based compensation declines, affecting cash flow. 

However, since going public, share-based compensation has fallen every quarter, including a 23% sequential decline in the latest period. That is promising, but the company needs to keep up this trend -- the $62.1 million in share-based compensation last quarter still amounted to 23% of revenue. 

An attractive safety net

Increasing the monetization of a growing user base provides a double boost to Pinterest's top line going forward. And the company's emergence as an e-commerce platform proves there are more use cases that can be tapped. I believe this creates a situation ripe for consistent revenue growth in the years to come, rewarding shareholders along the way.

And there's one final thing in Pinterest shareholders' favor. Thanks to its 2019 initial public offering, the company has $1.70 billion in cash, equivalents, and marketable securities. It also has zero long-term debt. If you're worried about a second market crash, investing in cash-rich, debt-free companies like Pinterest provides an important safety net.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Jon Quast owns shares of Pinterest. The Motley Fool owns shares of and recommends Facebook and Pinterest. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Pinterest Stock Quote
$25.12 (-2.75%) $0.71
Meta Platforms, Inc. Stock Quote
Meta Platforms, Inc.
$133.45 (-4.04%) $-5.62

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