Conditions in the stock market now are very bad. Growth investors, who benefited from more than a decade of aggressively loose fiscal policies dating back to the Great Recession, are feeling the fallout when the Federal Reserve finally takes the mega-pot away. It was a party, but a lot of investors think the lights are on and it’s time to go home.
Of course, the best time to buy stocks is when people think the party is over. There’s a reason many smart investors are excited now.
However, there is likely to be something to do with the market’s current “bearish” line of thinking. It is unclear how quickly the Fed will need to act as it tightens the money supply and raises interest rates in its efforts to control inflation once again. And for many investors, especially younger ones, this may be the first time they’ve experienced this kind of painful and prolonged downturn in the market. Thus, it is not clear how the collective psyche of the market will deal with the pressure.
However, as a long-term investor, the market-wide selloffs we’ve seen so far in 2022 also present opportunities. A large number of large companies are trading at lower valuations than I have seen in some time. Many growth stocks with strong fundamentals are penalized in the same way as their riskier peers.
Here are two companies that I consider to be among the greatest buying opportunities in this bear market.
Pinterest purchase status
A true winner of the epidemic, Pinterest (pins 6.50%) They saw what most investors would describe as massive growth over a short period of time. With the shutdowns, there has been an increase in interest in social media, an upward wave that has pretty much all been boating online.
Pinterest’s stock went from trading around $20 for most of 2019 and 2020 to over $80 a share at its peak. As of Tuesday, it’s back to the $20 level.
This move piques my interest because the market has essentially priced in all the growth that Pinterest has seen during the pandemic. Yes, the number of monthly active users of the platform has decreased in recent quarters, and may continue to decline compared to the impressive numbers last year. However, I think Pinterest remains a serious growth story from a minimalist perspective, especially over the long term.
In the first quarter of 2022, the company recorded a 9% decline in monthly active users globally. However, total revenue was 18% higher, which is a reasonable pace given this decline.
How did this happen?
Well, Pinterest has reported some excellent average revenue per user. Globally, this number came in at 28%. However, markets outside the United States and Canada reported much higher growth rates: in Europe, growth was 40%, and in the “rest of the world” geography it was 164%. While the total revenue coming from these regions is much lower than what Pinterest generates in North America, it has more room to grow in those markets. They are where the user growth comes from.
Now, it’s important to note that Pinterest’s 18% revenue growth rate for the first quarter was significantly lower than similar first-quarter results last year (which came in at 78%). In addition, concerns about the decline in the MAU numbers are real. However, I do believe that the unprecedented (and largely unexpected) rise in MAUs in the 2020/early 2021 period associated with the pandemic shutdowns has led to an unsustainable rally higher, which needs to see some moderate rebound. Compared to 2019 levels, Pinterest has fared great. Thus, the underlying influences from last year’s impressive results still haunt this stock. I think so unjustifiably.
On top of that, Pinterest’s much-talked-about partnerships with Shopify And WooCommerce helps it monetize better from its user base. As such, I think the impressive net income growth will overshadow the sluggish higher earnings growth, at least in the near term.
The case for the purchase of Zoom
Zoom Communications (ZM 11.62%) It was an incredibly superior performer for most of 2020. That stock went from under $100 a share to over $560 a share late that year. Since then, it has seen a fairly orderly decline and is back below $100 as of this week.
In fact, many of the underlying valuation metrics indicate that Zoom is trading more like a valuable stock than a highly-growth stock. With a price-to-earnings ratio of about 20, investors get a 5% dividend yield from a company whose revenue has grown by 55% over the past year. Looking at the company’s stock chart, it’s clear that the market believes this type of growth will not be repeated.
Maybe not. Many offices are reopening, most schools have fully returned to in-person classes, and the staggering increase in work from home that requires video conferencing may be easily dwindling. However, there are obvious reasons why the market is bearish on Zoom Communications.
Having said that, I think this opinion is overly simplistic. Experts suggest that despite a “return to normal,” the video conferencing market is likely to grow at a compound annual rate of 15.5% over the next five years. Should Zoom Communications maintain its impressive market leadership in key markets such as the US, this 15.5% growth would nearly double its revenue within five years. This is not bad for any company.
Like Pinterest, Zoom Communications is profitable – very profitable. I am convinced that a future that includes a hybrid business model will require Zoom technology. This doesn’t mean that competition in this sector won’t remain fierce, but I think Zoom has some technological advantages that investors are currently ignoring.