Folks that are accustomed to investing in growth stocks are no strangers to the volatile stock price fluctuations that often accompany these companies. Pinterest (PINS +0.43%) and Skillz (SKLZ 10.25%) are two examples of high-risk, high-reward growth stocks that are experiencing some big price moves at the moment.
The stock price for online multiplayer video game competition platform Skillz is down 27% in the last month as investors worry about the company's aggressive spending to acquire customers. Similarly, shares of image sharing and social media service Pinterest are getting hammered after the company reported a decline in monthly active users.
The crash in the prices for these two stocks could be an opportunity for investors looking for growth stocks and are willing to stomach the risks that come with them.
Image source: Getty Images.
1. Pinterest
Pinterest was growing revenue and monthly active users at a rapid rate. That is, until its most recent quarter when the company reported a decline of 24 million MAU. Still, Pinterest boasts a total of 454 million MAU. Importantly, Pinterest's ability to generate revenue depends largely on how many users it has. Marketers pay to influence people, so the more people on Pinterest, the more it can earn from advertisers.
Marketers appreciate that Pinterest offers an inspirational environment to associate their brands with. Increasingly, advertisers are placing importance on distancing themselves from platforms that contain toxic content. And options like Alphabet's YouTube and Facebook have so many creators making so much content, it's nearly impossible for the companies to monitor it all.
The risks are that the decline in MAU is a start of a trend that continues downward. Management highlighted that the decline in MAU resulted from economic reopenings causing people to engage with Pinterest less often. The pace of vaccinations against COVID-19 is increasing in many places, and it could eventually lead to a full reopening of economies. Does that mean Pinterest will continue to shed MAU?
The added risk has the stock price down 27.6% in the last month, thus creating an opportunity for growth investors willing to accept high risk in the hopes of generating high returns.
2. Skillz
Skillz is a unique gaming company. It offers consumers the option to wager on games they play against each other on the company's platform. Inherently, that will make the games more interesting to play and attract more people's attention. So far, that's playing out in the company's revenue growth.
Indeed, folks that play games on Skillz spend more time on its site than they do on YouTube or Facebook. Realizing they have a product that consumers like, management is spending aggressively to attract new users. Because the product is new and relatively unknown, it will bring a good return on that investment if the company can get the word out.
To highlight this opportunity, management showed investors that its long-term value per customer is 3.8 times higher than its customer acquisition cost. It's no surprise, then, that the company ramped up spending on customer acquisition to $40.5 million from $16.3 million in the year before.
Therein lies the risk in Skillz stock. The company is not yet profitable and is investing aggressively to grow its business. Three is no guarantee it will ever reach a scale that allows it to generate sustainable profits. Moreover, the reopening of economies could harm Skillz as folks spend less time at home on their electronic devices and more time outdoors.
However, the opportunity for Skillz, in the long run, outweighs the risks the company is facing. Therefore, investors are getting a good risk versus return with its stock.
