Want explosive investment returns? Bet on growth stocks: shares in companies that can increase revenue and earnings faster than the market average. Social media giant Pinterest (PINS -0.68%) and Chinese coffee chain Luckin Coffee (LKNC.Y -3.98%) fit the bill and can maintain their momentum. Keep reading to find out why.
Like many stay-at-home companies, Pinterest has experienced a slowdown as pandemic-related tailwinds fade in the social media industry. But the stock's recent dip is a great buying opportunity for investors with a long-term perspective. The company's image-focused business model is an easy sell for advertisers, and it is at the early stages of monetizing its massive international audience.
Image source: Getty Images.
Pinterest operates a social media platform that allows users to share images, often of purchasable items like clothing and accessories. The company's unique niche and its targeted audience (78% active of users are women) help it appeal to advertisers and e-commerce retailers who want to reach a shopping-motivated demographic.
Revenue surged 125% year over year to $613 million, and adjusted EBITDA increased from negative $34 million to a positive $178 million (this figure adds back $100 million in share-based compensation). But despite the stellar numbers, some investors are disappointed by the company's growth in monthly active users (MAUs), which deaccelerated from 39% to 9%, sending shares down 26% since the second-quarter report.
The market shouldn't have expected the pandemic boost to last forever. And this decline could be a buying opportunity. Pinterest can maintain its momentum by increasing global average revenue per user (ARPU), even as MAU growth slows down (international ARPU is just $0.35 compared to $5.08 in the U.S.). The company's strong niche will help management pull this off.
Luckin Coffee
With shares up 74% year to date, Luckin's turnaround story is in full swing, and it's not too late to hop on board. The company is still reeling from its prior management's fraudulent reporting. But with a tiny market cap and sales growth firing on all cylinders, the Chinese coffee shop is an excellent pick for investors willing to tolerate higher-than-average uncertainty for the potential for multibagger returns.
Luckin Coffee isn't filing financial reports with the Securities and Exchange Commission as it goes through bankruptcy restructuring. That means the most up-to-date information comes from a December liquidators report presented by its lawyers. Sales grew 36% in the third quarter of 2020, and the company achieved store-level breakeven for the first time last August.
The report also claims that Luckin could break even in cash flow by 2023 as it closes down underperforming stores and improves its criteria for opening new ones. Despite its challenges, Luckin Coffee seems to be a fast-growing and scalable business, which is excellent news for investors.
With sales of up to 4.2 billion yuan ($648 million) estimated in full-year 2020 and a market cap of $3.75 billion, Luckin Coffee trades at a price-to-sales multiple of just 5.8, which is reasonable for a fast-growing company with a potential pathway to profitability. The stock deserves a discount because of its ongoing restructuring, but the potential rewards seem to outweigh the risks at this price.
What is your investment strategy?
Pinterest and Luckin Coffee both offer the potential for massive returns over the long term. But Luckin probably has more multibagger potential because of its heavy stock price discount (which could be reevaluated upward in the future). Pinterest is a safer pick because of its established business and lack of regulatory overhangs.
