The market's shift away from growth stocks may be scary, but it's essential to look at things in context. And in this case, zooming out helps give a complete perspective. Growth stocks performed absurdly well between 2012 and 2021, and although many dropped like rocks last year, investors with a long-term mindset will want to look beyond that.
When considering whether to buy shares of a company, the most crucial factor shouldn't be its performance over 12 months, but rather the prospects of the company in question. With that in mind, let's look at one growth stock that was hammered last year and is now hovering near its 52-week low: Pinterest (PINS 1.33%). Here's why this tech stock is still a buy.
Pinterest offers a unique proposition
There are plenty of e-commerce companies around, making it a very competitive industry in which it is difficult to succeed. Pinterest managed to get around this problem, at least somewhat, by offering its users a unique value proposition. Pinterest users are known as pinners, and what attracts them to the platform is its image discovery flavor.
The company prides itself on helping pinners discover visual inspiration that helps them implement ideas in many artistic activities, home decoration and renovation, and recipes and meal plans. Importantly, Pinterest tries to stay away from the divisive area of politics. As the company's CEO, Ben Silbermann, once said:
Pinterest is not the place to read the news or debate politics with your cousin or compare yourself to other people. It is a positive place to be inspired and get ideas in your future life.
This ability to differentiate itself from other social media platforms is vital for Pinterest since it strongly suggests that it can coexist with its peers. Because Pinterest offers a fundamentally different experience, it does not need to steal users away from Facebook, Instagram, or Twitter. Users can enjoy all of these successful social media websites in addition to Pinterest.
Image source: Getty Images.
Considerable room to grow
One reason investors sold off Pinterest's stock last year was that the company's year-over-year user growth slowed considerably compared to 2020 and actually dropped throughout 2021. Pinterest's monthly active users (MAUs) peaked at 478 million in the first quarter, and then decreased sequentially in the second and third quarters. At the end of the third quarter, Pinterest had 444 million MAUs, a 1% increase compared to the year-ago period, but a 7% decrease compared to Q1 2021.
Pinterest makes money through the ads businesses run on its platform. The more users on the company's website, the more attractive it is to companies looking to reach a vast audience. But if it continues to lose users, these would-be advertisers might decide to take their money elsewhere.
However, let's remember that Pinterest's user base grew substantially at the peak of the pandemic as people had to endure staying home for long stretches of time. Once government-imposed lockdown orders expired, many so-called "pandemic stocks" saw decreased activity. Pinterest did not escape this dynamic.
The good news is that there remain hundreds of millions of potential pinners out there. Consider, for instance, that Facebook alone had 2.9 billion MAUs as of the end of the third quarter -- and it keeps on growing. Facebook's example shows that there is no strict upper bound on the number of people who can join Pinterest. The company's userbase had been increasing at a good clip in the years leading up to the pandemic, and it skyrocketed amid the outbreak.
And even though it recently decreased sequentially, it remains above its pre-pandemic levels. The company had 367 MAUs in the first quarter of 2020. Coronavirus-related dynamics have skewed the trajectory of Pinterest's user growth, but once the pandemic (hopefully) subsides, Pinterest's user growth will likely pick up. Meanwhile, the market for digital ads is expected to grow rapidly in the coming years. According to some estimates, it will expand at a compound annual growth rate of 15.3% through 2025.
This industry tailwind will help Pinterest turn things around moving forward.
An attractive entry point
Even with its recent struggles, Pinterest continues to record strong financial results. In the third quarter, the company's revenue jumped by 43% year over year to $632.9 million, while its net income came in at almost $94 million, compared to the net loss of $94.2 million it reported during the year-ago period.
Pinterest's ability to record strong top and bottom-line increases in the face of lackluster user growth bodes well for the company's future. And what's more, the tech company is currently trading at around $30 per share -- which is dangerously close to its 52-week low.
The company's forward price-to-earnings (P/E) of 23.4 -- compared to the sector average forward P/E of 20.2 -- and its forward price-to-sales of 6.5 are also about as low as they have been in more than a year. At current levels, investors would do well to scoop up shares of this attractive tech stock before they soar.
