By Jacob Sonenshine

If the market recovery continues, internet stocks will likely lead the way higher.

The S&P 500 has bounced back some 4% from its March low point, after concerns about the economic impact of President Donald Trump's tariffs had sent the index for a dive into correction territory (in other words, dropping 10% from a recent peak).

The rebound has come on the back of two main factors. The Federal Reserve indicated it expects to cut interest rates twice this year to support economic growth, while Trump floated the idea of rolling back some of the tariffs he had announced.

If the recovery continues -- and that's highly dependent on these two factors coming to fruition -- internet stocks should see the largest gains. The broader technology sector has averaged a 27% gain over the three months following the 20 worst market pullbacks since 1999, according to Trivariate Research. That makes it the best performer out of all 11 S&P 500 sectors in those instances. Within tech, internet is the best subsector, averaging a gain of just over 30% in those periods.

So we looked for household internet names that have already outperformed the market in the recovery so far. Two are Meta Platforms and Alphabet, which have risen 6% and 5%, respectively, off their March lows.

Another is Pinterest, which has seen its stock gain 7% from its March low. The $22.7 billion advertising-based platform for home goods and lifestyle ideas has plenty of profit growth ahead.

Analysts expect Pinterest's sales to grow 16% annually over the coming three years to $5.61 billion by 2027, according to FactSet. The company has been generating higher average revenue per user, or ARPU, each year as it increases the number of ads on pages. That has enhanced -- not degraded -- the user experience, because users are looking for actionable ideas that they can click on and make related purchases. Pinterest's ARPU this year is expected to hit $7.33, versus $58 for Meta. While nobody expects Pinterest to reach that height, it can close some of the the gap. That is partly because its ARPU outside the U.S. is less than $1, so there's plenty of room for more ads to drive that figure higher.

Meanwhile, analysts expect a modest increase in monthly active users -- Pinterest currently has about 553 million -- to contribute to rising revenue.

This has the potential to spur rapid profit growth. As the company grows revenue faster than expenses -- such as marketing and employee pay -- profit margins can race higher. That is why analysts expect earnings per share to grow 29% annually over the coming three years.

The kicker is the company has beaten earnings estimates in 18 of the past 20 quarters. So if that trend continues over the next few years, Pinterest's earnings should rise quickly -- and so should the stock.

Another stock to consider is Chewy, which has jumped 8% from its March low.

The $13.8 billion online seller of pet products is benefiting from increased spending on pet care. Mordor Intelligence, an industry research hub, says U.S. household spending on pets was about $85 billion in 2024, with just under 90 million households owning a pet. Spending should grow in the mid-single digits in percent terms annually for the next several years, the firm says, as millennials grow older and move into houses and buy pets. This age group also pays top dollar for their pets, being particularly concerned with their animals' well-being, which increases the amount of per-customer spending.

Chewy's latest results prove the story, as fourth-quarter sales and earnings beat expectations. The top-line figure grew 15% year over year to $3.25 billion, driven by a slightly larger customer base of about 20.3 million and higher per-customer sales. The company barely eked out a profit because of ballooning costs, such as marketing. But as it moves past the drastic increase in expenses and continues to grow sales, profit margins can expand. Analysts forecast that earnings will grow more than 40% annually over the coming two years. That's one reason Evercore analyst Mark Mahaney reiterated in a Wednesday note that the stock is one of his best ideas.

This backdrop should drive the stock higher, as shares are still more than 70% lower than their peaks in 2021, when it seemed like everyone was staying home and investing in their pets.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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March 26, 2025 15:49 ET (19:49 GMT)

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