Buy These 2 Growth Stocks on the Dip | The Motley Fool

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Shares of e-commerce site Etsy (ETSY 5.22%) and image-browsing platform Pinterest (PINS 3.34%) haven’t sniffed their all-time highs since 2021. These two stocks are down 78% and 68%, respectively, as of this writing. As a shareholder of both, the dip has been brutal and it’s been hard to keep holding.

Indeed, I’d say that my enthusiasm for Etsy and Pinterest over the long term had started to wane. But recent developments have rekindled my conviction for these businesses, which is why I believe these are growth stocks worth buying today.

Let’s start by affirming the stability of Etsy’s business. In the second quarter of 2023, the company’s revenue was up 7.5% year over year, active buyers were up 2.5%, and it turned a net profit of nearly $62 million. This ongoing profitable growth, albeit at a moderated pace, suggests Etsy is healthy.

I believe Etsy can get back to growth thanks to recent advancements in artificial intelligence (AI) — yes, Etsy is a surprising AI stock. As mentioned, the company’s base of active buyers remains strong. But spending per buyer was down 6% year over year in Q2.

Etsy’s management is taking the blame for that. Basically, with around 115 million listings, it’s hard to show buyers exactly what they’re looking for. But by advancing AI on Etsy, management believes search results will soon become increasingly relevant, leading to a resurgence of spending among active buyers.

If existing users start buying more, it could lead to a reacceleration of Etsy’s growth rate. Moreover, better sales conversions could attract more active sellers, expanding its available listings further.

In short, given its ongoing health and AI-enhanced search results, it may be time to buy Etsy stock with the expectation of better growth ahead.

Like Etsy, Pinterest is also in a healthy place. In the second quarter of 2023, its own revenue was up 6% year over year, boosted by 8% growth in its monthly active user base. And even though it had a net loss in Q2, it was manageable at $35 million.

I believe Pinterest is on the cusp of reinvigorating its growth rate and improving its profit margins through an important partnership with tech giant Amazon.

Amazon’s customers pay to advertise their products. But now, these ads could show up on Amazon’s platform or Pinterest’s platform, thanks to the new partnership. When ads are shown on Pinterest, it will boost Pinterest’s revenue because ads are how it makes money. And it could also improve its profit margins since Pinterest won’t have to spend on sales and marketing to attract Amazon’s ad customers.

Amazon’s third-party ad inventory could be just the first partnership of many for Pinterest. And this is a key reason Pinterest’s management expects faster growth rates to kick in soon.

If Pinterest can indeed speed up growth and improve its profit margins from deals like this, I believe the stock has a path to doubling in value within the next five years.

Both Etsy and Pinterest have lost to the average returns from the S&P 500 over the last three years. And down so much from their respective highs, I don’t necessarily expect Etsy stock or Pinterest stock to soar to new heights. In other words, it could still be some time before either stock is setting new records.

However, investing isn’t about how long it takes to get back to a previous place. It’s about what opportunities offer a favorable balance between risk and reward right now. Therefore, I’m looking at where Etsy and Pinterest stand today and believe both can do better than average from here.

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