1 Beaten-Down Tech Stock to Buy and Hold

Tech stocks have been on fire this year as the artificial intelligence (AI) boom is providing a significant tailwind to several of the most prominent players in the sector. Some AI-focused companies still have plenty of room to run, so it may not be too late to invest in them. However, investors might also want to consider going against the market and purchasing shares of corporations that haven't performed well this year, provided these companies have significant upside potential. One example that fits the bill is Pinterest (NYSE: PINS). Here is why the social media specialist is worth investing in.

Pinterest has made progress

Despite its unimpressive stock market performance this year, Pinterest has been moving in the right direction on multiple fronts. The company had to deal with a slowdown in the advertising market and declining monthly active users (MAUs) a couple of years ago, but the social media giant has mostly put these headwinds in the rearview mirror. In the second quarter, Pinterest's MAUs increased by 12% year over year to 522 million -- a new record for the company.

Growing its ecosystem is key for Pinterest: The more users on its platform, the more attractive it becomes to companies looking to launch ads to target specific customers. Pinterest's revenue in the second quarter jumped to $854 million, 21% higher than the year-ago period. Even better, Pinterest has turned a profit. The company's net income of $8.9 million was much better than the net loss of $34.9 million reported in the year-ago quarter.

With financial results like these, why isn't Pinterest performing better on the market? The company's shares dropped on the heels of its second-quarter earnings report partly because investors didn't like management's guidance for the third quarter, which projected slower top-line growth. The market is forward-looking, they say, but perhaps, in this case, it isn't looking far enough into the future.

In my view, Pinterest remains an excellent long-term bet despite whatever short-term challenges it might encounter this year. Here is why.

The long-term view

Pinterest's 522 million MAUs likely haven't peaked. True, the company has plenty of competition in the social media industry, but there is room here for multiple winners to coexist, as they have been doing for a while. Pinterest is different from most leading social media platforms. Its visual flavor and desire to avoid dividing social or political issues make it unique among its peers. So, there is still massive growth potential ahead, especially as it makes progress in international markets.

When will Pinterest peak? Note that Facebook, the largest social media website in the world, has a little more than 3 billion MAUs. Pinterest might not get that far, but in my view, it could eventually achieve 1 billion users. In the second quarter, 288 of Pinterest's MAUs were in the rest of the world (ROW) category (outside Europe and North America). However, ROW grew faster than all other regions. It also has the lowest average revenue per user (ARPU) by far.

In other words, Pinterest has substantial opportunities to continue growing its user base and improve monetization efforts in these markets. Further, one of Pinterest's long-term goals is for the platform to become an e-commerce hub. It has already made progress in this area. Pinterest recommends relevant shoppable ads and content to users based on their tastes. This is where the company is making some use of AI. Pinterest relies on an AI-powered algorithm that helps display content relevant to each user, hopefully incentivizing them to take action.

The company is getting better at putting precisely what users want in front of them: Pinterest's outbound clicks have increased by more than 100% for three quarters in a row. Between the company's opportunities for monetization in international markets, ramping up shoppable capabilities, and remaining user growth potential, Pinterest could deliver outsized returns to investors, provided they see past short-term volatility.

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Prosper Junior Bakiny has positions in Pinterest. The Motley Fool has positions in and recommends Pinterest. The Motley Fool has a disclosure policy.