3 Digital Media Stocks Setting Up For Further Gains

Digital media companies Pinterest NYSE: PINS, Snapchat NYSE: SNAP and Sea Limited NYSE: SE are all forming corrections after strong run-ups in 2020. 

Much has been written lately about pullbacks in techs, Internet companies, and growth stocks in general, following big gains in 2020.

Rather than taking a position of “nothing lasts forever,” investors would be better served by watching strong stocks consolidate, with an eye on purchasing shares when they turn higher. 

Pinterest, whose most popular boards are food and drink, home decor and DIY crafts, was perfectly positioned to benefit as Americans and people around the world upped their home design and cooking skills during the pandemic. Users turned to Pinterest for ideas. 

Early on during lockdowns, a decrease in advertising budgets resulted in two sequential quarters of losses and a slowdown in revenue. However, as 2020 wore on, ad campaigns were rethought and reworked, and the revenue came back to Pinterest, growing 58% in the quarter ended in September. Sharp increases in active users drove the ad dollars. The company reported 100 million users at the end of 2020.

Is the company well-positioned for the end of so much stay-at-home time, whenever that may arrive? Analysts think the answer is yes. 

The consensus rating is “buy,” with a price target of $76.53, although analysts expect a loss of $0.08 per share in the first quarter, on revenue of $455.57 million. Both would be year-over-year improvements. The company reports earnings on May 6. 

In addition to advertising dollars, management is looking to increasingly weave shopping into the platform, allowing users to purchase items without leaving the app. 

The stock raced 410.63 over the past year. It’s up 29.79% year-to-date, closing Friday at $85.53. It’s been consolidating in a cup-shaped pattern since retreating from its February 16 high of $89.90. 

Volume has been low during the consolidation, which is exactly what you want to see. The stock may go on to form a handle if it corrects further before clearing the current base. 

Snapchat is etching a double-bottom pattern. The stock pulled back twice, and is approaching a potential buy point above $65.13. Alternately, investors might see a second buy point if the stock passes its February high of $73.59.

A double-bottom pattern can be constructive as it shakes out weak institutional holders, including those without conviction or those taking profits after a big run-up. That clears the way for new investors to buy shares at a lower price.

Profit-taking could easily be a motivation at this point, following a rally of 364.88% over the past year. Shares closed Friday at $63.27, up $0.07 or 0.11%. 

This was another pandemic play, as users turned to the photo and video messaging app to communicate. The company met or beat earnings expectations in the past seven quarters. Analysts have a “buy” rating on the stock, with a price target of $66.29, a 4.77% upside. 

The company reports its first quarter on April 22. Analysts expect a loss of $0.21 per share on revenue of $742.04 million. 

A potential downside for investors is the company’s lack of yearly profitability. It’s turned a profit in several quarters, but is yet to post annual earnings. This year, Wall Street has pegged the loss at $0.50 per share. It remains to be seen whether a growing number of users and increased advertising revenue can result in profitability in the future. 

Sea Limited is a Singapore-based digital entertainment and e-commerce business with operations internationally. The company also operates an online payment platform. Its digital chopping arm, Shopee, has a fast-growing presence in Asian markets. 

Sea is boosting its financial capabilities. It recently acquired Composite Capital Management, a Hong Kong-based asset management firm. 

The stock returned 456.76% over the past 12 months. Shares closed Friday at $250.93, down $2.18 or 0.86%. It’s been correcting in cup-shaped pattern below its February 16 high of $285. 

Sea is a holding of the Ark Innovation ETF NYSEARCA: ARKK which specializes in the “disruptive innovation” space as well as the Ark Fintech Innovation ETF NYSEARCA: ARKF. Ark has been adding shares recently on the dip. That’s exactly the kind of confidence you’d like to see from institutional investors when you are considering buying any stock. 

Revenue growth accelerated in the past three quarters, a fundamental sign of strength. Over the past 12 months, revenue was $3.59 billion. The company has yet to turn a profit, although analysts see losses narrowing this year and next. 

While institutions such as Ark and others buy on a dip to support their positions, individual investors should use a bit more caution. While it’s not necessary to wait until it clears the previous high of $285, watch for a buy point within 5% of that price, ideally in heavy upside volume.