Growth stocks can be an essential component of any stock portfolio. That said, they're often volatile, with massive swings in price -- both up and down. Now, one of those downturns is upon us. With the Federal Reserve raising interest rates, some investors are selling growth stocks hand over-fist. Numerous growth stocks have seen their share price cut in half.
If, as an investor, you're willing to stick with them, growth stocks' tremendous volatility can work in your favor -- allowing you to gobble up shares on the cheap when the inevitable downturns arrive.
Let's look at three that still offer investors a lot of upside in the long term.
Image source: Getty Images.
1. Roblox
Users, particularly school-aged children, flocked to Roblox (RBLX 2.11%) during pandemic lockdowns and school closures to stay in touch with friends. But as the pandemic peaked and then subsided, Roblox's stock price went on a wild ride. After closing at an all-time high of $134.72 on Nov. 19, 2021, the stock shed more than 63% of its value over the last four months.
Similar to other 'stay-at-home' stocks like Zoom, Peloton, and Netflix, the winding down of the COVID pandemic turned these formerly must-own names into must-sells on Wall Street. Bearish analysts point to fears over decreasing engagement and slowing growth, but are those concerns valid -- particularly for long-term investors?
While it's true that some key metrics have slowed for Roblox, the company already has close to 55 million daily average users (DAU) -- and that number is still growing. As Roblox -- and its young user base -- matures, it's reasonable to assume the company will be able to increase its revenue by opening up untapped revenue streams (like advertising) or raising prices for in-game currency.
Analysts expect 2022 revenue of $2.9 billion, rising to $3.6 billion in 2023. CFRA expects Roblox to become profitable in 2023 and estimates earnings-per-share to rise to $0.41 in 2023 and $1.35 in 2024.
Moreover, with a market cap of only $27 billion, an acquisition is not out of the question. At least one mega-cap company is somewhat obsessed with dominating the metaverse. Would it, or someone else, be willing to buy Roblox and access to its 55 million DAUs? Only time will tell. Either way, I fully expect Roblox to bounce back from its recent downturn.
2. Pinterest
Pinterest (PINS 3.69%), the operator of a bulletin-board-style search engine, helps people find inspiration for home decor, food preparation, clothing, and other tastes and interests. Users 'pin' their favorite items, and Pinterest's artificial intelligence monitors and adjusts future suggestions based on this activity.
After an initial public offering in April 2019, Pinterest hit an all-time high of $85.90 on Feb. 15, 2021. But since then, the stock has retreated roughly 60% over the last 13 months, as investors have soured on high-multiple growth stocks that soared in popularity during the pandemic.
However, upon closer inspection, Pinterest doesn't really fit this category. Its forward price-to-earnings (P/E) ratio is 20.8 -- only slightly above the long-term S&P 500 average of 16.7. Compared to Shopify, which sports a gaudy 227.3 forward P/E ratio, Pinterest seems downright cheap. The bears point out that its monthly active user count (MAU) has been shrinking for months. And while this is a disturbing trend, it's not the slam-dunk, argument-ending data point that many would claim.
First of all, trends change. If Pinterest can stabilize its MAUs, which management recently disclosed is happening in 2022, then the argument goes away completely. Moreover, the company is already profitable; it doesn't need supercharged user growth. It needs to capture more revenue from its existing users -- and it's doing that already.
Pinterest's average revenue per user (ARPU) grew from $1.41 in Q3 2021 to $1.93 in Q4 2021. Online advertising is a competitive market with companies like Alphabet, Facebook, and Twitter jousting for position. But, Pinterest provides a unique value proposition to advertisers: many of its users are researching do-it-yourself (DIY) projects of one kind or another. As data privacy regulations make it more difficult for social media companies to track, compile, and exploit user data, Pinterest's reputation as a go-to network for DIY brainstorming should lead it to thrive.
3. Snap
Last on my list is Snap (SNAP 26.27%). The California-based operator of Snapchat has seen its stock collapse from last year's all-time high. After peaking at $83.11 on Sep. 24, 2021, Snap shares have fallen to nearly $36 -- a drop of 57% in six months.
However, the stock's price action and the company's long-term prospects have diverged. Snap reported better-than-expected earnings results for the fourth quarter of 2021. Adjusted earnings per share were $0.22 -- beating the consensus estimate of $0.10. Full-year revenue rose to 4.1 billion, representing a 64% year-over-year increase.
Most importantly, two key metrics related to advertising continue to grow: daily average users and average revenue per user (ARPU). Snap reported 319 million DAUs at the end of 2021, while ARPU increased to $4.06.
Like Roblox, one of Snap's greatest strengths is that its user base is young -- very young. The company estimates that 90% of the 13 to 24-year-old population in established markets (i.e., United States, United Kingdom, Australia, France, and The Netherlands) are monthly active users of its platform. Needless to say, that sort of user base is very appealing to advertisers, and it will only grow more appealing as those users age and have even more disposable income. As the company is quick to point out, Snapchat is less than 2% of the US digital ad market, but it reaches almost half of US smartphone users.
In other words, Snap is well-positioned to capture far more of the advertising market as its user base grows older. That sounds like a recipe for success if you're willing to ride out the volatility.
