Over the past two months, Wall Street and investors have been given a not-so-subtle reminder that corrections are unavoidable in the stock market. Both the benchmark S&P 500 and technology-dependent Nasdaq Composite have navigated their way through double-digit percentage declines since the year began.
But over the long run, the stock market has proven to be a bona fide wealth-building machine. Every single stock market crash and correction throughout history has eventually been erased by a bull market rally. Investors who buy great companies, and stick with those companies for many years, are often rewarded handsomely for their patience.
Image source: Getty Images.
With this being said, there's one beaten-down growth stock that, in my view, stands head and shoulders above all other fast-paced companies as the top stock to buy this month. It's a company that, despite a number of question marks from skeptics, has all the tools necessary to make investors richer in March, and most importantly, well beyond. That company is social media up-and-comer Pinterest (PINS 4.04%).
Even top-notch stocks have risks
Before diving into the reasons why Pinterest makes for such a lights-out buy in March, let's first tackle the skepticism that's caused shares of the company to fall 70% since hitting an all-time high.
Arguably the biggest objection from skeptics is the company's sequential quarterly decline in monthly active users (MAUs). By the end of March 2021, Pinterest hit an all-time high of 478 million MAUs. Since then, the company's global MAUs have declined to 454 million by the end of June, 444 million when September came to a close, and 431 million to end 2021. This 431 million figure actually works out to a 6% year-over-year decline in MAUs. Wall Street tends to place a lot of emphasis on nominal active user growth for social media companies, so this nine-month MAU drop is front and center for skeptics.
Another concern for those who dislike or prefer to simply avoid Pinterest is the adverse effect Apple's (AAPL -0.35%) new privacy measures will have on social media-based businesses. Beginning with iOS 14.5, Apple began asking users who downloaded apps from its App Store whether or not they wanted to allow an app to track their data.
Social media companies that sell advertising space allow businesses to use this data to gauge the effectiveness and targeting of their ad campaigns. The thinking here is that if a lot of users opt out of data tracking when downloading apps, it could hurt ad-pricing power and/or the willingness of merchants to pay for advertising.
Skeptics were also likely concerned about Pinterest's valuation. At its peak last year, Pinterest was commanding a trailing price-to-earnings multiple of more than 100. With inflation soaring to a 40-year high and the Federal Reserve almost certain to raise interest rates, Wall Street has been less inclined to accept high valuation multiples.
Image source: Pinterest.
Here's why Pinterest is the best stock to buy in March
As a Pinterest shareholder, I can respect the above concerns. However, they don't worry me in the least for a number of reasons.
Let's begin with Pinterest's MAU statistics. Although the past nine months have resulted in sequential quarterly declines, the year prior produced MAU gains that were well above historic norms. The decline since the end of March can be explained by rising COVID-19 vaccination rates, which have encouraged people to get out of their homes and return to some semblance of normal. If investors examine Pinterest's MAU growth over a longer stretch of time (three or more years), they'll see that the arrow is still pointing decisively higher.
To build on this point, slowing MAU growth hasn't affected the company's ability to monetize its users. Think about this for a moment: Despite global MAUs declining 6% in 2021, with U.S. and international MAUs falling 12% and 4%, respectively, average revenue per user (ARPU) rose 36% globally, 43% in the U.S., and 80% internationally. ARPU data clearly demonstrates that merchants are willingly paying more to get their message (and products) in front of prospective shoppers.
I'd also like to note that international ARPU represents Pinterest's greatest growth opportunity. In 2021, U.S. and international ARPU were separated by a mile ($21.98 versus $1.59, respectively). However, most user growth moving forward is expected to derive from beyond the borders of the United States. Throughout the decade, international ARPU could double multiple times.
Image source: Getty Images.
What's more, Apple's privacy changes are unlikely to affect Pinterest in the same way as other ad revenue-driven social media platforms. Virtually all other platforms rely on data tracking and/or some variation of likes to determine the interests of users.
Meanwhile, the entire premise of Pinterest's platform is for users to share the things, places, and services that interest them. There's no data prying involved. Users are willingly telling the world what they like, which makes it exceptionally easy for Pinterest to act as the facilitator to get users in contact with merchants that can meet their interest(s). It's precisely why ARPU figures are climbing 36% globally despite a 6% drop in year-over-year MAUs.
The company hasn't been afraid to invest aggressively in its platform, either. Among the dozens of new features launched or beta-tested in 2021 was Idea Pins. These video-format messages are helping merchants reach more users and keep them engaged. When coupled with ad marketplace automation initiatives designed to optimize value for merchants of all sizes, Pinterest has laid the groundwork to grow into a popular e-commerce destination.
As for valuation, Pinterest looks to be about as inexpensive as it's ever been. The company is sitting on close to $2.2 billion in net cash (deducting for operating leasing liabilities) after generating nearly $753 million in operating cash flow over the trailing 12 months.
Furthermore, it offers a forward-year price-to-earnings ratio below 20 despite maintaining a sales growth rate of more than 20%. In other words, the company's price-to-earnings-growth ratio (PEG ratio) is below one -- and a PEG ratio below one often implies an undervalued stock.
It's for all these reasons that Pinterest is a top stock that can make investors richer in March and for many years to come.
