The broad S&P 500 stock market index might be near an all-time high, but below the surface, some of the most popular technology stocks have collapsed. Many have declined by more than 50% from their highs, far surpassing the typical bear market threshold of 20%.
The sell-off is caused by uncertainty about the new omicron coronavirus variant and the prospect of interest rate increases occurring faster than investors were predicting in 2022. Both of these concerns have dampened the market's appetite for risk, meaning investors are less willing to pay sky-high prices for technology stocks in particular.
But that might be an opportunity for patient investors with a long-term time horizon. Here are three companies helping to build the future, with beaten-down stock prices that make them worth buying now.
1. Block: Down 40%
Block (SQ 6.13%) is the business and consumer payments giant formerly known as Square. It rebranded to reflect its increasing diversification away from merchant services and into other innovative segments, including blockchain technology.
But despite this new direction, Block hasn't abandoned its most profitable segments, which are centered around payment services. For businesses, Block provides hardware that allows merchants to process credit card purchases in-store, in addition to loans and other services. And on the consumer side, Block's CashApp serves as an alternative to bank accounts for its 40 million monthly users, with instant peer-to-peer money transfers, and even a stock and cryptocurrency investing platform.
Excluding Bitcoin, Block's various segments have delivered a gross profit margin of 55% so far in 2021. That's compared to just 2% for the Bitcoin segment, which is mostly derived from CashApp users transacting in the cryptocurrency.
Block's stock has been crushed recently amid the tech sell-off, but there's plenty for investors to be excited about. The company is acquiring buy now, pay later giant Afterpay, which will allow consumers to finance small purchases through CashApp, providing a potentially enormous boost for Block's merchants within the ecosystem.
Analysts expect Block to generate $17.6 billion in revenue by the close of 2021, placing the stock at a price-to-sales multiple around 4.4. It's a significant discount to just two months ago, and since the company is now consistently profitable, it certainly warrants consideration for long-term investors -- especially given how aggressively Block is growing its umbrella of businesses.
2. Affirm Holdings: Down 37%
Affirm Holdings (AFRM -1.06%) is the world's largest stand-alone buy now, pay later company even despite the recent sell-off. It trailed Afterpay for the last few years, and when that company was acquired by Block, it looked as though Affirm was being left in the dust. However, in a spectacular counterpunch, Affirm recently secured a deal with Amazon, the world's largest e-commerce company.
Affirm will be featured in the checkout of Amazon's online platform. When customers are making a purchase, they'll have the option to finance it rather than paying with their own money. When the deal was announced in August it ignited a rally in Affirm's stock from $70 to $176, eclipsing Afterpay's $29 billion deal with Block in the process.
Unsurprisingly, Amazon offers Affirm enormous growth in users and gross merchandise value (GMV). Combined with Affirm's existing deal with Shopify, it now has a $600 billion-per-year opportunity in front of it. That's a 7,000% increase on the GMV it processed in fiscal 2021, which ended on June 30.
Affirm is also expanding beyond standard integrations with merchants' online stores, into physical cards for consumers to use buy now, pay later's short-term financing anywhere they like.
The steep correction in Affirm's stock presents a strong long-term opportunity for investors, given its innovative approach to consumer finance, and the potential offered by its deals with Amazon and Shopify.
3. Upstart Holdings: Down 60%
The third and final stock that's down big and worth buying now is Upstart Holdings (UPST 1.47%). It's one of the best performers of 2021, with a 280% year-to-date return, even after accounting for the recent 60% collapse in its stock. At one point in October, Upstart had gained over 800% for the year with a price of $401, before tumbling to the $155 it trades at today.
The company has leveraged artificial intelligence to transform the way banks assess potential loans. Upstart's goal is to use its technology to unseat the decades-old FICO credit scoring system, by analyzing over 1,000 different data points to gain a more comprehensive perspective of potential borrowers. So far it's working exceptionally well, with Upstart-originated loans resulting in 75% fewer defaults for the same approval rate.
The company began in unsecured lending before entering its largest market yet, secured vehicle loans. It has built an impressive network of car dealerships and it has done so quickly through its acquisition of Prodigy, a car sales software platform now known as Upstart Auto Retail. In the recent third quarter, it had 291 dealers using the new sales and loan origination service, up 219% from the same period last year.
Since Upstart is a loan originator, it doesn't lend any money itself and therefore carries almost no credit risk. It earns a fee when its banking partners write a loan using its algorithm, and also sells its software to institutions that want to integrate it into their application processes.
At the beginning of 2021, Upstart estimated it would generate $500 million in revenue for the year. It's on track to deliver $800 million, and in 2022 analysts estimate it will bring in over $1 billion for the first time in the company's history.
But with the rapid expansion of its vehicle-lending segment it could blow all expectations out of the water again next year, and that makes the currently discounted stock price a major opportunity.