After a 2020 that included a big crash and then an even bigger recovery, 2021 has been more temperate (with just a couple short bursts of volatility) by comparison, and the S&P 500 is sitting on a 24.7% gain year-to-date. That big gain has more and more investors worried about the increased chances of a market crash.
Stocks for many of the best companies in the market are trading at all-time highs and growing. Some veteran investors would tell you it makes sense to buy shares of the top companies, even at a premium. But the risk-averse are not so sure. They think the bubble may be about to burst. So what's an investor to do?
One option is to research great companies that happen to be trading at expensive valuations now and wait for a market crash to buy in on them. If a market crash does occur, any investor should pounce on shares of Square (SQ -4.18%) and Upstart (UPST -7.34%). Let's find out a bit more about these two stocks.
1. Square: Harnessing new opportunities for growth
Square stock has been an amazing performer over the past five years, gaining almost 2,000% in share price value. In 2021, its rise has leveled off somewhat and the stock has only gained 6% but still trades at a price-to-earnings (P/E) ratio of around 242 (The S&P 500 averages 29.5 right now). Third-quarter earnings, released last week, were mixed, and the market sent the stock price down 6.7% in the days that followed.
Square is such a compelling stock because of its vast market opportunity. It has two main businesses: a seller's business and Cash App, a personal-finance app. Each of these businesses offers a large and growing suite of services with a huge client market.
The seller's market suffered during the pandemic, but as Square gets back to business and rolls out more services, its seller's business performed better than Cash App in the 2021 third quarter.
|Segment||Revenue||Revenue growth YOY||Gross profit||Profit growth YOY|
|Sellers||$1.4 billion||44%||$606 million||48%|
|Cash App||$2.4 billion||16%||$512 million||33%|
|Total||$3.8 billion||27%||$1.13 billion||43%|
The company made a splash at the beginning of the year when it bought more than $200 million in Bitcoin. It also began Bitcoin trading, which it counts as revenue, and it accounted for a disproportionately high amount of total revenue growth last quarter. But as the price of Bitcoin stabilized to some degree since then, this accounted for less revenue. Bitcoin trading decreased, and Q3 revenue jumped from 27% growth with Bitcoin to 45% without it.
Sellers, on the other hand, is successfully making a deeper dive into larger, mid-size businesses, which jumped from 28% of gross merchandise volume in Q3 2019 to 33% in 2021. Cash App still provided most of the revenue, but sellers is making a comeback.
Square is making lots of investments in both arms of its platform, including the highly talked-about acquisition of buy now, pay later (BNPL) company Afterpay. Adding BNPL, along with a new savings account feature, greatly amplifies Cash App's features and extends the runway for growth in this segment.
It's clear investors like Square stock, especially considering its highly elevated P/E ratio. For the wary investors out there, a market crash might present a more opportune time to grab shares.
2. Upstart: Revolutionizing how loans are approved
Upstart became one of the hottest stocks this year when revenue exploded over the past few quarters and the company began to turn a profit. The stock price is up more than 1,460% since it debuted on the markets last December.
The company provides an attractive service for small banks with its artificial intelligence-based risk-assessment platform. Upstart doesn't issue the loans itself, it just takes care of the loan approval process and partners with banks that provide the actual loans. Its model runs customer data through hundreds of data points to assess true risk, as compared to the traditional scoring model that puts potential clients into broad categories. This resulted in higher approval rates with lower risk, and 71% of loans were approved instantly.
Upstart's second-quarter revenue increased more than 1,000% to $194 million, and the company posted $36 million in net income after a loss the year before. And it's still a small fish in a big sea. Upstart has a total addressable market of $4.2 trillion, which is the amount of U.S. consumer credit in the second quarter. That includes $635 billion in car loans -- a market that Upstart recently entered when it acquired Prodigy software in April -- and it reaches 95% of the U.S. population.
One of the risks with Upstart is that most of its bank-loan business is concentrated with one banking partner. But it's taking steps to expand. In addition to the auto-loan acquisition, it has been adding bank clients, such as Four Corners Community Bank last month.
In the meantime, Upstart shares currently trade at high premium, with a whopping P/E ratio of 481. If the market crashes, it's a no-brainer stock to put on your shopping list.