Chegg, Pinterest, and Roblox have been experiencing dramatic stock price decreases since late last year. The three stocks are caught up in the broad market selling of growth stocks. The Federal Reserve is raising interest rates, and when that happens, it makes growth stocks more expensive because future cash flows are discounted at higher rates.
In addition to the rising-rate headwind, the three stocks mentioned above were also huge pandemic winners. Now that economies are reopening, investors are concerned with operating performance in a post-pandemic economy. Admittedly, those are both legitimate concerns for investors to have. However, the market might be overreacting, selling these growth stocks down more than they should be, creating an opportunity for long-term investors to buy shares at a discount.
RBLX, PINS, CHGG, Pinterest, and Chegg data by YCharts.
Chegg
Chegg is an education technology company with a massive competitive advantage. It has 75 million pieces of proprietary content it has spent years creating. Chegg sells monthly subscriptions to college students who access this treasure trove of educational resources. As part of a subscription, students can also ask 20 questions per month answered by Chegg's subject-matter experts. The process ensures Chegg only creates content that students are willing to pay for.
The company has nearly tripled revenue from $255 million in 2017 to $776 million in 2021. Further, there are solid efficiencies of scale built into the business. Simultaneously, operating income expanded from a negative $23 million to $78 million. The sell-off in Chegg's stock has it trading at a price-to-free-cash-flow of 27.75, near the lowest in the last five years.
CHGG Price to Free Cash Flow data by YCharts.
Pinterest is an image-based social media platform that boasts 431 million monthly active users. The site and app are free to join and use, but so are many other entertainment options like the company I will discuss next. Pinterest makes money by showing advertisements to the folks browsing its platform. In that regard, it has delivered excellent growth. From 2018 to 2021, sales have increased from $756 million to $2.6 billion.
And Pinterest is only scratching the surface of its potential. Advertisers spent $763 billion globally in 2021; Pinterest's $2.6 billion was a relatively tiny fraction of that total. Suppose the company can continue offering innovative features that attract monthly active users to log on more frequently and stay longer each time they open the app. In that case, Pinterest can keep expanding inside the massive and growing advertising industry. Like Chegg, the sell-off in Pinterest stock has it selling at nearly the lowest valuations in the last three years.
PINS Price to Free Cash Flow data by YCharts
Roblox
Last but not least is Roblox, the metaverse pioneer. The company has grown to claim 55 million daily active users on its platform, where they can virtually interact with each other and their environment. It's free to join and use; Roblox makes money by selling an in-game currency called Robux, which is needed to experience premium features unavailable to free players.
The company sold enough Robux to generate $1.9 billion in revenue in 2021. That was up from just $325 million in 2018. Roblox is not yet profitable on the bottom line but is generating healthy operating cash flow. If it keeps growing revenue and users at the rate it has been, it might only be a matter of time until profits start accumulating.
Nevertheless, like Pinterest and Chegg above, the considerable decline in the stock price has it trading near its lowest price-to-free-cash-flow in years.
RBLX Price to Free Cash Flow data by YCharts.
A final thought
There is certainly justification for each of the above stocks pulling back as economies have reopened and interest rates have risen. Customer and revenue growth has slowed for each company, and the pandemic has yet to end entirely. However, the headwinds are likely to be temporary, and each has excellent prospects in the long term. Investors buying into these growth stocks should be aware that the volatility that caused these stocks to sell below $50 per share is likely to persist in the short term, but the potential payoff makes taking the risk worthwhile.
