These 2 stocks are stars in the making

The S&P500 has plunged 25% so far this year as I write this. Although upsetting for investors, now is the perfect opportunity to pounce on solid stocks at low prices. A smart investment strategy is to buy and hold stocks of growing companies that have a good chance of beating the market over the long term.

The two I have in mind are a visual based social media company pinterest (PINS -3.83%)and e-commerce retailer Etsy (ETSY -4.02%). Both of these businesses received a solid boost from the pandemic shutdowns, when social media platforms and online outlets attracted people stuck at home. It is unreasonable to expect companies to maintain the same momentum indefinitely, but both are growing even in today’s challenging macroeconomic environment. Let’s take a closer look at why these stocks look like fantastic long-term investments.

Image source: Getty Images.

1. Pinterest

The rumor that Alphabet might be interested in buying Pinterest has sparked interest in the company again and while investors will have to wait to see if there’s any truth to it, I think Pinterest can thrive on its own in the long run. And I’m not put off by Pinterest stock’s 74% drop from its all-time high.

Despite a drop in monthly active users (MAUs) in the second quarter, Pinterest revenue grew. MAUs were down 8% in the US and Canada year-over-year and 4% in Europe. However, its worldwide average revenue per user (ARPU) grew 17% year-over-year to $1.54 per user, both in the US and overseas. In the second quarter, total revenue increased 9% year over year to $666 million.

The social media company spent more than $233 million on research and development, while sales and marketing accounted for up to $212 million. This shows that it continues to spend on improving its technology to increase user engagement and attract more advertisers.

In the third and fourth quarters, the company anticipates a “moderate sequential increase” in the number of monthly active users worldwide. According to management, the increase in revenue in the third quarter could be in the middle of the figures compared to the quarter of the previous year.

Pinterest is developing strategies to provide more “inspiring” content on its platform. This, in turn, could help improve the shopping experience for users and the success of advertisers. It is also in good financial shape, ending the quarter with $1.6 billion in cash and cash equivalents.

Recently, Bill Ready, who oversaw the commerce, payments, and “next billion” segments at Alphabet, became the CEO of Pinterest. The sudden change in direction caught some investors off guard, but I think it could work out well. It will be interesting to see how the new CEO takes Pinterest to great heights given his background in e-commerce and payments. This social media tech stock, with a price-to-sales ratio of 5.9, is cheap to buy now if you want to make big gains when it reaches its full potential.

2.Etsy

The pandemic has helped Etsy thrive. Today, investor skepticism about the company’s ability to thrive post-pandemic helped send the stock down 65% from its all-time high. But the constant growth of its income proves that it is capable of becoming a thriving business in the long term.

Etsy is a two-sided Internet marketplace connecting buyers and sellers. It operates in the United States, United Kingdom, Canada, Australia, Germany, France, India and countries in Latin America.

Although inflationary pressures may have affected its second quarter results to some extent, the company nevertheless acquired 7 million new buyers. Consolidated gross merchandise sales (GMS) fell 0.4% to $3 billion, but generated revenue of $585 million, up 10.6% year-over-year. However, according to management, “increased expenses related to employee compensation” caused a 26% drop in net profit compared to the year-ago quarter.

The company’s strength is its unique business model focused on consumer personalization. This helps the company identify repeat consumer behavior or habitual shoppers. Etsy’s platform allows unique small businesses to market their personalized products.

In April, Etsy increased its seller transaction fees from 5% to 6.5%, which will help drive more revenue as long as many sellers don’t leave the platform. Etsy plans to use this additional income for marketing and sales tools.

Both of these stocks have a depressed price and a lot of potential. The key is not to abandon the stock market when it is down, but rather to carefully choose strong companies for a well-diversified portfolio.

Suzanne Frey, an executive at Alphabet, is a board member of The Motley Fool. Sushree Mohanty has no position in the stocks mentioned. The Motley Fool holds and recommends Alphabet (A-shares), Alphabet (C-shares), Etsy and Pinterest. The Motley Fool has a disclosure policy.

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