2 Stocks With Nearly 200% Upside
It’s a tough time for tech stocks. After hitting impressive highs in November 2021, the Nasdaq Composite is down more than 25 percent year-to-date as of mid-May 2022. Day after day, the index seemed to hit new 52-week lows. That’s bad news for growth investors because Nasdaq is home to tech companies that have historically been winners. For example, stocks like Amazon, Zoom, Shopify, and Alphabet are all listed on Nasdaq, and all are down considerably since the start of the year.
The good news is that the tech industry’s dismal year-to-date results aren’t necessarily a sign of future returns. Some of the companies that have lost big in 2022 have the potential to deliver strong returns for those who buy at today’s discounted prices.
There are two stocks getting lots of attention in the current market: Upstart (UPST) and Snowflake (SNOW). Both are tech disruptors that started trading publicly in the second half of 2020. Though both are down since their respective launches, analysts suggest each has an upside between 100% – 200%.
So, will Upstart stock go up? Will Snowflake stock recover? Here’s what you need to know.
Upstart Evaluates Creditworthiness Intelligently
Many people have experienced the frustration that comes with a low FICO score. Too often, these are people who generally pay their bills on time, but they hit a rough patch that drove their credit score down. That means years of paying higher-than-average interest rates, if they can get credit at all, despite the fact that they are doing all the right things — for example, finishing school and maintaining stable employment.
Upstart is a new method of measuring creditworthiness. It dumps the traditional FICO score in favor of 1,500+ alternative data points that are measured and evaluated with the help of artificial intelligence.
For the moment, Upstart supports a variety of auto loans and personal loans, and its model has been wildly successful. The company has originated more than $25 billion in loans, and 74 percent of those were fully automated. Compared to FICO-based models, Upstart approves 26 percent more borrowers, and Upstart customers enjoy interest rates that average 10 percent lower than FICO-based products.
Why Did Upstart Stock Go Down?
Since it hit its 52-week high of just over $400 per share in October 2021, Upstart stock has been drifting down along with the rest of its tech industry peers. However, when Upstart reported its first-quarter 2022 results, Upstart stock dropped dramatically. It lost more than 50 percent of its value in the first full day of post-results trading as investors reacted to the earnings report.
It wasn’t so much the first-quarter numbers that had investors alarmed. In fact, those results demonstrated solid progress. Total revenue increased 156 percent year-over-year to $310 million, and total fee revenue went up by 170 percent to $314 million. The total value of loans originated by bank partners increased 174 percent year-over-year, and income from operations grew from $15.6 million in the first quarter of 2021 to $34.8 million in the first quarter of 2022.
Perhaps most importantly, GAAP net income increased from $10.1 million in the first quarter of 2021 to $32.7 million in the first quarter of 2022. Adjusted net income increased from the prior year’s $19.9 million to $58.6 million. Adjusted EBITDA went from first-quarter 2021’s $21 million to a total of $62.6 million.
The trouble is that Upstart adjusted its second-quarter and full-year guidance down, and that created anxiety for shareholders. Management explained that rising interest rates are likely to cause a decline in lending activity, so rather than the $1.4 billion in 2022 revenue forecast when fourth-quarter results were released, expectations have been revised to $1.25 billion in revenue for the year.
Is Upstart a Buy?
Upstart has demonstrated that its method works, and that’s great news for borrowers and Upstart’s partner banks. To date, the company has delivered solid growth in every metric that matters, which led to a rapid rise in share price through the end of 2021.
Now that tech stocks are struggling in general, and Upstart is entering a particularly challenging environment, that growth may be stifled a bit. However, the company’s 47 percent projected growth is still pretty exciting. Some analysts believe Upstart stock could go up 200 percent or more over the next 12 months. When considered against a current P/E ratio of less than 20, it is clear that Upstart is a buy.
What Does Snowflake Do?
Snowflake isn’t actually a Nasdaq stock — it trades on the New York Stock Exchange. However, that’s not the only thing that sets it apart from other tech startups. Snowflake created an elegant solution for a widespread issue that developed as the digital transformation took place.
Essentially, Snowflake allows companies that collect data across multiple platforms and cloud computing services to combine and analyze all of their information in one place. That’s a hugely valuable function at a time when identifying inefficiencies and enhancing customer experiences are top priorities.
Snowflake’s product was so impressive that it led to another area of distinction. When Snowflake went public, Warren Buffett invested, marking the first IPO he participated in since taking control of Berkshire Hathaway in 1965.
Will Snowflake Stock Go Up?
Snowflake stock went down along with the rest of the tech sector after it peaked in November 2021. Year-to-date, it has declined nearly 60 percent, and shareholders aren’t expecting any relief in the coming weeks.
On the plus side, the most recent earnings report shows that revenues are on their way up. For fiscal fourth-quarter 2022, the three-month period ending January 31, 2022, revenue growth came in at 102 percent year-over-year.
The problem is that Snowflake is not profitable — yet — and it is still fairly expensive, even after recent losses. In the current economic environment, those are two big strikes against any publicly-traded company, which is why Snowflake stock went down.
Nonetheless, analysts are optimistic about Snowflake’s future, considering the unique nature of its product. Clearly, Snowflake’s clients see the value in the data analysis capabilities Snowflake provides, as its customer base is growing and its customer retention rate is exceptionally high. Snowflake believes its total addressable market is $90 billion — perhaps more.
Savvy investors expect Snowflake stock will go up. That makes buying Snowflake stock at today’s discounted prices a smart decision.
