This year has been a phenomenal year for some stocks, but others would rather put it behind them. Three stocks that had a rough 2021 are PayPal (PYPL -1.14%), Twilio (TWLO -1.59%), and Pinterest (PINS -0.64%), each losing 23%, 22%, and 45%, respectively.
For Twilio and PayPal, the market has readjusted each stock's valuation and given investors a buying opportunity. Pinterest has a business metric going in the wrong direction that the market has focused on, yet investors are ignoring its potential revenue. Could 2022 be a rebound year for this trio of stocks?
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1. PayPal
The payment-behemoth PayPal has had some wins throughout 2021. Amazon announced it will begin accepting Venmo -- a mobile-payment app that PayPal owns -- in 2022. PayPal itself is not accepted through Amazon's checkout, so adding Venmo is a huge growth driver for the company. It also introduced the ability to checkout with cryptocurrencies like Bitcoin or Ethereum, attracting many consumers who want the ability to use their crypto for daily spending.
The company had some bad publicity, too. Its shares dropped over 10% when it was rumored to be acquiring Pinterest. To remedy the situation, the company issued a one-sentence statement the next week declaring it was "not pursuing an acquisition of Pinterest at this time." Still, the damage had been done, and PayPal's stock hasn't recovered from the losses sustained by the speculation. The company's partnership with eBay is also ending, but eBay Marketplaces only made up 3% of PayPal's Q3 total payment volume (TPV), down from 7% in 2020.
PayPal's third-quarter revenue grew 13% but increases to 25% when eBay revenue is excluded. It also grew accounts by 15% and TPV by 26%. The company turned 21% of revenue into a free cash flow of $1.3 billion, giving it plenty of cash to fuel growth.
PayPal trades at a price-to-earnings (PE) ratio of 45. It last traded at this level during March 2020 during the pandemic sell-off lows. It's expecting to grow its TPV and revenue by 39% and 28%, respectively, for 2021, both excluding revenue derived from eBay. At these prices, PayPal is almost too cheap to ignore. It could be a good time for investors to pick shares up before the company's price returns to a normal level.
2. Twilio
Twilio's software allows businesses to create communication tools so they can interface with customers using many methods like text messaging or video communication. A training course is offered by the company and is intuitive enough that even non-software engineers can create programs.
Twilio's price-to-sales ratio has been falling since the beginning of the year, and the stock is inching closer to its pre-pandemic valuation.
TWLO PS Ratio data by YCharts.
While some may still consider trading at 17 times sales expensive, Twilio is a top software-as-a-service (SaaS) stock. Investors might be willing to pay for leading companies, especially when management is projecting 30% organic growth for the next three years. The company grew revenue at 65% during Q3 and organic revenue -- which subtracts acquisitions and other items -- increased 38%. Twilio also has a strong 131% dollar-based net-expansion rate, which means existing customers spent 31% more this year than last.
The biggest concern with Twilio is its profitability. It has reported zero quarters with positive GAAP earnings per share (EPS) since its public debut in 2016. Losses are getting worse, leaving the market wondering if Twilio will ever turn a profit. Additionally, Twilio's stock-based compensation is diluting shareholders, causing each share to control less of the company. When Twilio issues more shares to compensate its employees, it slices the company ownership pie into smaller pieces, without increasing the overall pie size. Though these facts are known, investors should be focused on Twilio's long-term potential.
Twilio has been acquiring multiple companies -- like Zipwhip in 2021 and Segment in 2020 -- to expand their communication solution footprint. When a company is bought out its employees often receive big payouts, fronted by Twilio which increases losses. Once Twilio has captured as much of the market opportunity it believes is available, it could start cutting back on acquisitions and stop hiring as many employees. By doing this, it will become a more streamlined and profitable company.
Customer communication will be huge in the future, and Twilio is sacrificing near-term profitability for long-term market share. With its valuation returning to normal levels, it wouldn't be unreasonable to expect revenue growth returns soon. Considering Twilio's 30% organic growth, investors should have it on their radar going into 2022.
3. Pinterest
Since Pinterest hit its near-$90 peak price in February, the stock has consistently lost value, falling to less than $40. Pinterest's social-media app lets its users discover ideas and save them to their personal boards. Users go to the app looking for ideas, making it a unique advertising platform -- which is a key point in Pinterest's favor.
The more eyes Pinterest can bring to the platform, the more valuable it will become. However, Pinterest's U.S. Q3 monthly active users (MAU) declined by 10% and also decreased in Q2. The market zoned in on this metric and punished the stock during the second half of the year.
What investors might want to factor into their decision is Pinterest's rising average revenue per user (ARPU). It increased by 44% to $5.55 in Q3, driving 43% revenue growth. For reference, Meta Platforms' U.S. ARPU was $52.34. If Pinterest can continue growing its ARPU as it did during Q3, it will inch closer to Meta's value during 2022 and beyond. This will likely turn around the stock performance, but if ARPU growth stagnates, investors are likely to head for the exits. Additionally, Pinterest's partnership with Shopify should grow revenue as users discover products from smaller merchants.
As the calendar turns to a new year, PayPal, Twilio, and Pinterest are well-positioned to reward shareholders. While each has some risk associated with it, the potential for market-crushing growth is high. Volatility is normal with this group, as 2021 indicated. Investors should consider adding shares if they can hang on through brutal years, because the upside for PayPal, Twilio, and Pinterest is potentially huge.
