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Trick or Treat? 3 Beaten-Down Stocks That Could Soar After Halloween

By Brian Withers, Danny Vena, and Will Healy – Oct 31, 2021 at 7:45AM

Key Points

  • The pullback in The Trade Desk's stock provides investors a good buying point.
  • Imagination-fueled shopping could keep investors tacking on more Pinterest.
  • Lemonade is just getting started with its growth story.

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This trio could provide patient investors with many happy Halloweens to come.

Stocks don't always move in concert with a company's business results. Many high-growth stocks often experience dips in their stock price. Sometimes these dips can feel more like canyons for shareholders. When this happens, it's hard for novice (or even experienced) investors to know whether the reduced stock price is a trick or a treat.

We asked three Fool.com contributors to sort through this dilemma and recommend a stock that's been hit hard, but can bounce back and climb to new highs in the coming years. They came up with The Trade Desk (TTD -1.80%), Pinterest (PINS -2.15%), and Lemonade (LMND -4.73%).

Kids in Halloween costumes with candy baskets.

Image source: Getty Images.

The Trade Desk: Not as scary as it looks

Danny Vena (The Trade Desk): Gather round kiddies. It's time for a little Halloween horror story, involving our favorite programmatic advertiser, The Trade Desk.

In recent months, two tales of woe have weighed on digital advertising stocks, dragging most of the industry down in the process. Alphabet's Google said earlier this year it has plans do away with ad-tracking cookies.

At the same time, tech giant Apple introduced new privacy measures, requiring users to explicitly opt in to allow apps to follow then across the internet. Both moves struck terror into the hearts investors in adtech stocks, causing widespread share price declines.

Investors got another fright after Snap reported earnings. On the earnings conference call, CEO Evan Spiegel said the company's "advertising business was disrupted by changes to iOS and tracking that were broadly rolled out by Apple."

The Trade Desk stock has been falling like a heroine in a horror movie and is currently is down more than 20% from its recent high. Yet investors armed with the facts need not be spooked, as The Trade Desk CEO Jeff Green has previously addressed these issues.

Late last year, Green revealed that of the 12 million ads its platform assesses every second, only about 1 million of those will have less data as a result of Apple's privacy move. He went further, saying it "doesn't have a material impact on our business." 

With regard to Google and the death of tracking cookies, The Trade Desk has been preparing for this eventuality for years. Earlier this year, Green said: "Not much has changed. But what has changed, will ultimately prove positive." He went on to say that cookies only impact the "browsing internet," which accounts for less than 20% of all data-driven digital ads. 

The biggest growth areas in digital advertising and the vast majority of ads nowadays are served up on connected TV, streaming audio, video, and music, as well as mobile, in-app, and podcasts -- which all play to The Trade Desk's strengths.

Furthermore, the company developed Unified ID 2.0, the most widely recognized substitute for cookies in the industry, to address that 20%. The Trade Desk has also assembled the largest coalition of advertisers, who have adopted and joined its platform. 

The Trade Desk's recent results tell the tale. Revenue in the second quarter grew 101% year over year, partially the result of the low bar set in 2020. Earnings per share also grew 100% and customer retention stayed above 95%, a streak the company has maintained for seven years. 

This illustrates that investors have nothing to fear from The Trade Desk and buying at these scary levels will likely provide investors a well-deserved treat.

A person looking at their tablet on an outdoor balcony.

Image source: Getty Images.

Pinterest: Consider pinning this growth story 

Will Healy (Pinterest): Notwithstanding the volatility brought about by PayPal Holdings' flirtation with the company, Pinterest remains an attractive holding investors should not unpin. Pinterest reaches its audience by capitalizing on the visceral appeal of fantasies and imagination. This allows its site to reach an audience that surveys might never uncover. Also, through promoted pins, advertisers can more effectively market to these engaged audiences.

Admittedly, this competitive advantage does not insulate the company from all challenges. The drop of nearly 50% from its 2021 high may also lead existing stockholders to question this investment. Moreover, the fact that Pinterest experienced a sequential decline in monthly active users (MAUs) in the second quarter may not attract investors.

However, bulls have good reason to believe that Pinterest stock still has upside for investors. For one, the decline occurred as browsing activity dropped following COVID-19 lockdowns as users spent more time offline. Also, year over year, MAUs still rose 9% to 454 million in the second quarter.

Furthermore, Pinterest continues to earn more from its user base. The average revenue per user (ARPU) for the company rose to $1.32 in Q2. This was an 89% increase from the second quarter of 2020. Additionally, international ARPU remains a small fraction of that of the U.S. ARPU for U.S. users rose to $5.08 versus just $0.36 outside of the U.S. This points to the tremendous potential Pinterest holds beyond U.S. shores.

This success led to $1.1 billion in revenue in the first half of the year, increasing by 102% compared with the first six months of 2020. Also, a net income of $48 million during the first six months brought a dramatic improvement from the $242 million loss in the same period in 2020. Limiting the increase in expenses to 32% helped to significantly boost profit growth.

Additionally, Pinterest will release Q3 earnings on Nov. 4. The company expects revenue increases to slow to the low-40% range on a year-over-year basis. Due to such news, investors have focused on the negative with the recent stock price decline.

Still, its price-to-sales (P/S) ratio has fallen to 13, its lowest level in more than a year. Moreover, given its growth in a more challenging environment, its strong performance could improve as usage patterns more closely resemble those experienced before the pandemic.

Couple relaxing with a glass of lemonade.

Image source: Getty Images.

Lemonade: A sweet treat in the making

Brian Withers (Lemonade): Lemonade shareholders have had a crazy ride this year with the stock rocketing to over $180 in January only to fall more than 60% to where it is today. But investors who choose to buy now should be rewarded over the long term. This company has all the ingredients to create sweet returns for patient shareholders.

First, the company has solid growth in its core business. Customers are up 48% year over year and in force premiums (the sum of all annual premiums in place) is up an outstanding 91%. What's even better is that once customers have initiated a policy, over time they are expanding their insurance products with the company. In force premiums per customer are up 29% year over year and even up 7% sequentially.

Metrics

Q2 2020

Q1 2021

Q2 2021 

Change (QOQ)

Change (YOY)

Customers

0.8 million

1.1 million

1.2 million

10%

48%

In force premium (IFP)

$155 million

$252 million

$297 million

18%

91%

IFP per customer

$190

$229

$246

7%

29%

Data source: Lemonade. QOQ = quarter over quarter. YOY = year over year.

Second, it's eyeing an even bigger prize. Today, the company offers insurance products for renters, homeowners, pet owners, and even life insurance. But it's in process of adding auto insurance to its lineup. Management estimates that its existing customers are spending more than $1 billion with other insurance providers for auto coverage, and are betting that they'd rather get their coverage through Lemonade. The market for auto insurance in the U.S. is huge at around $250 billion, dwarfing the existing business Lemonade has today. If it can be successful with its auto offering, this could certainly be a boost to the stock.

Lastly, the company has barely penetrated the markets it's already in. For example, its renters insurance is only offered in 28 states and just three countries in Europe. The more lucrative homeowners product is only offered in 23 states so far. With more than 125 million households in the U.S. and even more in Europe, the company has plenty of runway to grow its tiny 1.2 million customer base.

Even with the stock beaten down, its valuation is more expensive than its peers, but that shouldn't worry investors who are in it for the long term. This disruptive insurtech has plenty going for it. If investors put this stock in their Halloween basket this year, over the next decade they should be rewarded with a treat of market-beating returns.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Will Healy has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, Lemonade, Inc., PayPal Holdings, Pinterest, and The Trade Desk. The Motley Fool recommends the following options: long January 2022 $75 calls on PayPal Holdings, long March 2023 $120 calls on Apple, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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