Equity markets suffered in 2022, but tech stocks seem to have been impacted more than most other industries. Here is one way to see that. The tech-heavy Nasdaq has been the worst-performing of the three major U.S. market indexes over the past year.
So, it isn't hard to find beaten-down tech leaders right now, and some of these corporations have the tools to put up much better performances moving forward. With that said, let's look at two stocks that could perform better in 2023 than they did last year: Pinterest (PINS 1.67%) and Chegg (CHGG 0.81%).
1. Pinterest
Over the past two years, shares of the social media company Pinterest fell along with the broader market for (at least) a couple of reasons. First, its user growth decelerated -- and even turned negative for several quarters. Second, the advertising industry slowed down due to businesses reining in their spending. Pinterest makes its revenue from ads, so this issue affected its financial results and its stock performance.
These headwinds are worth keeping an eye on. But they hardly constitute a death sentence for Pinterest. Concerning its user base, Pinterest was able to stabilize it. In the third quarter, the company's monthly active users (MAUs) came in at 445 million, which remained flat compared to the year-ago period.
What's more, management argues that a Google search algorithm update that took effect in November 2021 hampered its ability to attract new users. During Pinterest's Q3 earnings conference call, the company's CFO, Todd Morgenfeld, said, "By the end of the year, we will have lapped the Google Search algorithm update from November 2021 that had an impact on our ability to grow MAUs."
Further, the advertising slowdown won't last forever. Yes, many businesses that rely on ads are struggling, but once the economy rises again, that will change. It's worth noting that even amid this issue, Pinterest has been able to grow its top line. In Q3, the company's revenue jumped by 8% year over year to $685 million.
Pinterest was able to move its top line in the right direction thanks to increasing engagement. The company's average revenue per user (ARPU) in the third quarter came in at $1.56, 11% higher than the year-ago period. Boosting engagement will remain a key priority for Pinterest, as management has emphasized. Despite still being down by 35% in the past year, Pinterest's stock has been up by 25% in the last six months. It has crushed the broader market in this period.
The company could continue to do so in the near term as its user growth, engagement, and ARPU keep increasing. More importantly, Pinterest's platform could be successful over the long run, especially if it utilizes its image discovery aspect, which is unique among social media giants, to turn its website into a hub for e-commerce. The opportunity here is vast, and that's why investors should stick with Pinterest despite the struggles it has recently encountered.
2. Chegg
Chegg is a learning platform that helps students with expert solutions to homework problems, textbooks, and more. Like Pinterest, Chegg became much more popular during the pandemic when people were stuck at home. Once that ended, the company's shares dropped.
In Q3, Chegg's revenue decreased by 4% year over year to $164.7 million. The company's adjusted net income declined to $30.4 million, compared to $33.9 million reported in Q3 of 2021. However, there is hope for Chegg. First, In April, Chegg essentially divested its required materials business, which offered textbook rental and related services.
That was the main reason behind the company's revenue decline during Q3.
Second, the company's subscription service continues to perform well. In Q3, Chegg Services' revenue increased by 8% year over year to $159.3 million. It ended the period with 4.8 million Chegg Services subscribers, an increase of 9% compared to the year-ago period. The company can still grow substantially in this department. Here is why.
Chegg sees a potential market of 100 million students worldwide. It has captured only a tiny piece of this worldwide opportunity, and much of it remains untapped. Making headway within this target market will help it grow its revenue and earnings. Further, Chegg's platform arguably benefits from the network effect.
Students seeking textbook or homework solutions are attracted to the website as more experts come along to answer their questions. And with more subject matter specialists on the platform answering complex questions, it becomes more attractive to students. Chegg may have had a poor year in 2022, but its revenue has grown steadily over the past decade.
CHGG Revenue (Quarterly) data by YCharts.
Once difficult comparisons with the pandemic years cease -- and the effect of the divesture of its required materials business fade -- Chegg should start growing its top line again. Chegg's shares have gained 37% in the past six months. Look for the company to carry this momentum into 2023.
