The stock market has been performing amazingly well in 2021. The SPDR S&P 500 ETF has been at or near an all-time high all year, with its biggest drop being in October when it fell 5%. But not all stocks have followed a similar path. Some have fallen up to 70% off their all-time highs. Two of the biggest names that got crushed in 2021 were Pinterest (PINS 0.60%) and Lemonade (LMND +0.54%) -- falling 52% and 72% off their highs, respectively.
Despite their falls, both companies have strong potential and made substantial business progress while their stocks were pounded. This progress might pay off in 2022, which could send their stocks up to all-time highs.
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1. Pinterest is not an MAU story
Shares of the social media company have gotten hammered in 2021, slowly falling from the highs they hit in the first few months of the year. The company was up against tough 2020 comparables in its earnings reports. The use of Pinterest rose drastically during the COVID-19 pandemic, but as the world slowly reopened, the company saw slower growth internationally and even a decreasing user count in the U.S.
In Q3 2020, for example, Pinterest has 98 million U.S. monthly active users (MAUs), but that decreased to 89 million in Q3 2021. In Q4 2020, Pinterest saw international MAU grow by 46%, compared to Q3 2021 growth of just 4%.
While many investors worry about this declining growth, this isn't the primary key to success for Pinterest. The real opportunity for Pinterest is in the increased monetization of its MAUs. Pinterest has plenty of room for expansion of its average revenue per user (ARPU), especially when its ARPU of $1.41 is compared to other social media stocks. Snapchat (SNAP 5.41%) has an ARPU of $3.49, and Meta Platforms' (FB 0.82%) ARPU is a whopping $10.
The company has made important strides during 2021 to increase this monetization. One of those was Pinterest TV -- where creators can sell products from a video -- as well as efforts to make it easier for users to add items to a cart to buy later.
This increased effort makes advertising on Pinterest more valuable to advertisers, and if these efforts are effective at increasing its ARPU in 2022, investors could see accelerating revenue growth. Currently, the company is growing ARPU at 37% year over year, but the company has the potential to hasten this growth. If the improved efforts are successful, Pinterest could experience significant revenue growth, which could finally make Pinterest a favorable investment again in 2022 and send shares soaring.
2. Lemonade's future is bright despite current losses
Like Pinterest, shares of the AI-based insurance company have been hammered in 2021. Almost six months after its initial public offering (IPO) in July 2020, the company saw shares skyrocket, jumping over 120% by the start of 2021. However, the hype of the IPO faded, and a tough first quarter due to the Texas freeze (failures in the natural gas infrastructure system that nearly halved the state's gas production) started a downturn that resulted in shares falling 71% off its all-time high.
The Texas freeze hit Lemonade's net loss ratio, which shows how much the company has to pay in claims for how much it earns in premiums. In Q1, Lemonade's loss ratio reached 121%, meaning that the company paid out significantly more than the money it made in claims (not the best business model). Since Q1, its net loss has decreased, but it is still higher than what the company is aiming for. In Q3, the company's loss ratio was 77%, but the company says its loss ratio should be under 75% in the long term.
Part of the reason the loss ratio was above 75% in Q3 was because of the rollout of its newer products, like car and pet insurance. The AI for Lemonade's newer products is still being fine-tuned, which is currently resulting in a higher net loss ratio for those products. Yet, despite the loss ratios being high, they are improving rapidly. The pet loss ratio improved by 4 percentage points sequentially, while the homeowners' loss ratio improved by 52 percentage points year over year.
Clearly, there are trends showing that Lemonade's AI is getting more accurate with its newer products. And as these products mature and the AI gets more precise, investors will likely see these loss ratios improve substantially. The loss ratio has the potential to fall below the 75% threshold, which could help Lemonade rise again and turn investor sentiment positively toward the company.
The bottom line for both companies is that investors fell out of love with them. Since the reasons they lost hype do not fully represent the company's success, the tide could turn in 2022. If each company's investments into its business in 2021 pay off, today might be a nice buying opportunity to reap benefits going into the new year.
