Growth stocks as a class have taken a beating this year as inflation has surged and the Federal Reserve has indicated it will steadily raise benchmark interest rates and tighten its monetary policies to bring inflation back in check. When interest rates rise, the market increases the degree to which it discounts the value of companies' future cash flows. That hurts growth stocks more than others.
But among today's beaten-down growth stocks, investors can find some incredible values. For example, Pinterest (PINS -1.73%) and Chegg (CHGG 5.10%) are down by 75% and 78%, respectively, from their highs. Both have excellent long-term prospects that make them screaming buys at these prices.
Chegg's stock has crashed by 78%
Education technology company Chegg serves college students worldwide. Its 5.4 million subscribers pay $15 to $20 per month to access a vast array of educational material to help them master their course material: The platform already boasts 79 million pieces of proprietary content.
As part of a subscription to Chegg, students who don't find precisely what they need in that massive library of existing content can ask up to 20 questions per month of Chegg's subject matter experts, and get answers. Those questions and answers then get added to the platform and become available for other subscribers.
That treasure trove of useful content has fueled brisk revenue growth. From 2018 through 2021, sales increased from $321 million to $776 million. During that time, revenue growth surpassed 20% every year.
Best of all, Chegg's content attracts subscribers through low-cost or free channels like search engines. This has allowed it to keep marketing costs low and helped it boost its operating income from a loss of $6 million in 2018 to a profit of $78 million last year.
Chegg faces headwinds in the near term. U.S. college enrollment has fallen by roughly 1 million students over the last two years as the pandemic complicated education. Chegg's stock now trades at a price-to-free-cash-flow ratio of 22, its lowest valuation by that metric in the last five years.
Pinterest's stock has crashed by 75%
Pinterest currently boasts 433 million monthly active users. That's up 2 million from the previous quarter, but down 55 million from its peak in Q1 2021.
The image-based social media platform experienced a surge in traffic early in the pandemic, when billions of people were suddenly spending much more of their time at home. The site plays host to a robust community of creators who post inspirational images and thoughts about an enormous array of activities, hobbies, and fandoms. But with societies gradually returning to their pre-COVID behaviors and folks spending more time away from home, they're looking to Pinterest for inspiration less often.
That said, Pinterest has grown revenue from $473 million in 2017 to $2.6 billion in 2021. It was expanding even before the pandemic, so it's not entirely dependent on folks staying home all day. What's more, Pinterest operates in a $763 billion advertising industry.
The sell-off in Pinterest's stock has it selling at a price-to-free-cash-flow ratio of 22, its lowest valuation in several years.
A final word
Both Chegg and Pinterest are suffering as the market falls out of love with growth stocks. To make matters worse, both face headwinds in the near term that exacerbated their sell-offs. Their long-term prospects remain intact, but the stocks may struggle to gain footing as interest rates rise and the world's recovery from the pandemic progresses unevenly.
Their beaten-down valuations provide enough upside for investors to take on the greater risk in the near term.