While stocks have been shooting higher during the back half of June, it has still been a challenging year for investors, especially in tech. The tech-heavy Nasdaq Composite index is down 25.8% year to date.
However, these declines can create attractive opportunities for some investors. Three stocks in particular are looking deeply discounted right now despite being attractive businesses. Here's why you might want to consider adding to PayPal Holdings (PYPL -0.85%), PubMatic (PUBM 1.49%), and Pinterest (PINS 3.19%) to your portfolio.
1. PayPal Holdings
With shares down almost 75% from their all-time highs, PayPal looks extremely appealing today. The company has had its struggles recently, but even after recent hiccups, it is still an industry leader in the fintech space with over 5.2 billion payment transactions and 429 million active accounts in the first quarter of 2022.
Shares have sunk like a stone because of the company's shift in strategy. Historically, the company has developed its peer-to-peer payments platforms by acquiring users at any cost. The company even had a goal of reaching 750 million active users at one point. However, this has changed. Now, the company wants to focus on driving monetization from its high-engagement consumer base. While this should provide a higher return on PayPal's marketing spend, the newer strategy is largely uncharted waters for the company.
While PayPal hasn't tried to expand in this manner before, it is seeing initial success. After management announced this strategic shift in Q4, PayPal saw transactions per active account outpace account expansion: Transactions per active account reached 47 in Q1, jumping 11% year over year.
While this transition appears to be going well, Wall Street strangely seem to believe that PayPal is going downhill from here. Shares trade at about 17 times free cash flow -- the company's lowest multiple since 2019. Many investors don't have high expectations for PayPal, which could be a big mistake. If the company can execute this transition from account growth to engagement, PayPal could sustainably thrive.
PubMatic also trades at a cheap multiple of 18 times earnings, despite having a massive market ahead of it. PubMatic is one of the leading platforms where digital publishers turn to get help filling their ad space. Some estimates say PubMatic has a 46% share of the industry, but fears of a recession have caused investors to flee.
This thinking makes sense: If businesses need to cut back on spending, advertising is an easy place to do it. Considering PubMatic makes money when it facilitates ad impressions, less ad spending means less revenue for PubMatic. As a result of this predicted trend, shares have dropped more than 50% in 2022.
The assumption that PubMatic would get hurt during a potential recession is not unrealistic, but management isn't foreseeing a significant, long-term impact on the business. In Q1, the company maintained its guidance for the full year, and it anticipates a steady 25% top-line increase in 2022 with a 36% adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) margin.
Additionally, the long-term opportunity for PubMatic is enormous: By 2024, the company predicts global digital ad spending will reach $627 billion, meaning there could be room for PubMatic to grow over the long term. With a positive short-term outlook and lucrative long-term potential, shares look like a steal today.
Shares of Pinterest were getting crushed far before 2022. In fact, since reaching their all-time high in early 2021, shares of this social media company have dropped more than 77%.
Pinterest's platform saw a boost in activity during the COVID-19 lockdowns when consumers couldn't do anything outside. Instead, they browsed Pinterest to find inspiration for projects, like home renovations. However, as lockdowns subsided in the U.S., the number of active users began to fall, which has continued to this day. In Q1 2022, the company had 433 million monthly active users, which declined 9% year over year.
However, Pinterest's potential does not reside in its ability to expand its user count. Rather, long-term success could come from increasing its average revenue per user (ARPU). In Q1, Pinterest's ARPU was just $1.33 globally. AComparatively, Snap, another social media company trying to slide into the shopping and e-commerce space, posted an APRU of $3.20 over the same period. If Pinterest can catch up to peers and improve the monetization of its already-large user base, it could see explosive growth from here, even if its user count stagnates.
Pinterest is working hard to become a shopping platform, but continued innovation is critical. The company has made strides with this recently, including recent acquisitions, personalized shopping pages, upgraded product detail pages, and, most recently, a CEO change-up, but it will be essential to ensure this continues.
At just 21.5 times free cash flow, investors aren't expecting much out of Pinterest. However, Wall Street could be underestimating Pinterest's success if the company can drive ARPU higher by becoming a seamless shopping platform. Because of this, it might be worth getting skin in the game with Pinterest.