Stocks have taken investors for a wild ride over the past few years. However, those who invested through the ups and downs know well that both the best and the worst market days can present opportunities.
Investor sentiment can be highly fickle. You can never tell whether a company is a great or not-so-great buy on the basis of its share price alone — even when investors are buying a stock in droves. Instead, you need to look at the underlying business, and ensure that there is a valuable core buying thesis to add that stock to your portfolio and hold it for several years at least.
If you’re on the hunt for promising growth stocks as 2024 kicks off, here are two names you might want to consider before the week is out.
1. Pinterest
Pinterest (NYSE: PINS) dealt with a series of bumpy quarters after its pandemic highs, a function of fluctuating profitability and considerably moderated growth in users as well as revenue. One should factor in poor comparisons to unusual periods of growth during the pandemic. After all, this was a time when ad spending, Pinterest’s primary form of revenue, was raging with so many people stuck at home shopping for goods.
In the difficult economic environment that followed, ad spending was curtailed. This is a trend that may fluctuate, particularly in the short term given ongoing concerns about the global economy and continued geopolitical unrest. And expecting pandemic-era growth numbers may not be realistic.
Still, Pinterest looks to be slowly but surely turning things around, as the trajectory of ad spending has shown strong indications of recovery. The platform, known for its visually appealing website and app, is free to use. However, many of the images and videos that cover Pinterest’s platform are actually ads paid for by businesses across a range of industries and sectors.
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While it’s true that people are gearing spending more toward experiences than items these days, and discretionary spending is in flux, companies across a variety of industries pay for ad space on Pinterest. These companies range from pharmaceutical companies and clothing brands to beauty brands and grocery stores.
The most-searched categories on Pinterest include home decor, travel, fashion, DIY inspiration, health and wellness, and food and drink. This information indicates that users are going onto the platform with wide-ranging forms of search intent. In doing so, they encounter related ads along the way that can turn that interest into a purchase.
Pinterest is making significant strides to increase its value proposition to brands that buy ad space on its platform, which boasts a monthly active user base of 482 million individuals globally. One of the ways the company has been doing that is through its direct links initiative, just launched in the third quarter, which allows the user to go from Pinterest directly to the brand’s purchase page in a single click.
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In the third-quarter earnings call, CEO Bill Ready noted that the company has migrated 60% of its lower-funnel revenue to direct links. These changes accomplished a 39% decrease in cost per outbound click for the business paying for the ad space, and achieved an 88% increase in outbound click-through rates (the percentage of users who see an ad and click on it). In other words, more users are clicking ads on Pinterest to get directly to the merchant’s purchase site, and the merchant is saving money in the process.
For a company like Pinterest that makes its bread and butter from ad spending, this is exactly the type of growth you want to see.
The most recent quarter saw Pinterest grow its monthly active user base by 8% from the year-ago period, while average revenue per active user rose 3%. Revenue totaled $763 million for the three-month period, an 11% increase from one year ago. GAAP net income came in at $7 million.
While growth is muted from a few years ago, this doesn’t look like the story of a flailing business. Now could be a good time to scoop up some shares, which, while still a fraction of the stock’s all-time high, are up about 40% from one year ago.
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2. Upstart
Upstart (NASDAQ: UPST) is another stock that has had quite the run-up recently. Over the past 12 months, shares are up by close to 60%. The stock has slumped about 20% since the start of 2024.
Investors aren’t happy that the company is still bleeding net losses, and revenue remains down significantly. There are also broader concerns about the state of the current lending environment and where it’s going in the coming months.
For a company like Upstart, whose bread and butter is fees from facilitating loans for credit unions, banks, and institutional investors, it’s certainly a difficult operating landscape.
It’s worth pointing out that Upstart’s lending volume isn’t down just because consumers are hesitant to apply for loans. Upstart’s platform is built on artificial intelligence and machine learning capabilities, which enables the company to leverage approximately 1,500 data points, not just the FICO score, to determine consumer creditworthiness.
Historically, Upstart’s platform has driven 44% more approvals than the credit-only model while assessing annual percentage rates that are 36% lower on average. Upstart’s platform is constantly adjusting and learning. Using its artificial intelligence and machine learning capabilities, Upstart estimates loss rates when it originates the loan and assigns a risk level to that corresponding applicant.
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So in a period where risk of default is still elevated as interest rates are at an all-time high, Upstart is approving way fewer loans than usual, and it’s had to carry more than usual on its balance sheet. These trends should reverse as economic conditions relax and its model recalibrates.
Upstart’s partners still fund most of the loans it processes. In the first nine months of 2023, Upstart funded only 13% of loans it processed, while 53% of loans were purchased by institutional investors and the remaining 34% were funded by originating lending partners.
Upstart continues to expand into various areas of the multitrillion-dollar lending market, including mortgages and autos. Auto dealerships are adopting its AI-powered auto financing program so rapidly that it expects to cover 90% of the U.S. population by the end of the first quarter of this year. Not only are 88% of Upstart loans fully automated, but the company also has 900% more lending partners on its platform than it did at the time of its initial public offering in 2020.
In an environment where loan volume is down and loan denials are higher than usual, given elevated consumer credit risk, these factors make for one ugly balance sheet. However, a less tepid lending environment should change things around. Upstart looks like a stock to at least watch closely, if not scoop a few shares if you’re a more risk-tolerant investor.
