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2 Hypergrowth Stocks to Buy in 2022 and Beyond

By Will Healy – Jan 7, 2022 at 2:50AM

Key Points

  • A sell-off has interrupted the hypergrowth of many stocks.
  • ServiceNow has emerged as a compelling SaaS investment.
  • An expansion into auto loans could further boost the AI-driven gains of Upstart.

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The sell-off in growth stocks also offers a chance to buy to these two companies at a discount.

The stocks for ServiceNow (NOW 1.60%) and Upstart Holdings (UPST -3.76%) had both seen substantial growth in 2021 before getting caught up in a broad-based sell-off toward the end of the year. The popularity of both tech stocks arguably priced them for perfection before the bear market weighed in.

However, revenue growth for both companies remains robust, and lower stock prices should make them attractive to more investors. Such conditions could set them up to reclaim some lost gains, possibly bringing about hypergrowth again in 2022 and beyond.

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Image source: Getty Images.

1. ServiceNow

ServiceNow is a SaaS company that utilizes software for managing digital workflows and operations. This has attracted almost 1,300 customers who spend over $1 million annually, a 25% increase over last year.

However, companies such as Salesforce also compete in this business sector. That might lead to questions regarding whether customers and shareholders should choose ServiceNow over its competitors. Customers tend to choose ServiceNow for its simplicity and scalability. ServiceNow also allows users to manage workflows from anywhere, connecting the people, functions, and systems necessary for operations.

While Salesforce can make similar claims, ServiceNow also adds financial services operations to its platform, something that Salesforce customers must purchase separately. ServiceNow also offers 24/7 customer support free of charge, a benefit that comes with an added cost when using Salesforce.

This likely helped ServiceNow bring in almost $4.3 billion in revenue in the first nine months of 2021, a 31% increase compared with the first three quarters of 2020. That comes in far ahead of technology data company ReportLinker's forecast, which estimates a compound annual growth rate of 13% for the SaaS industry through 2025. While analysts predict a 26% revenue increase in 2022, ServiceNow's growth should remain far ahead of most peers.

Moreover, the $204 million in net income for the first three quarters of 2021 doubled compared with the same period in 2020. A $36 million improvement in other income came from reduced losses on extinguishment of debt, while a $21 million reduction in income taxes compared with the same time last year increased the percentage growth of the bottom line.

ServiceNow's stock price grew by 18% in 2021, slightly beating Salesforce's 14% gain. Still, it has risen by about 625% over the last five years. Also, the price-to-sales (P/S) ratio of 21 may seem high when Salesforce sells for nine times sales. Nonetheless, with a growing cadre of high-revenue clients drawn to its platform, ServiceNow should boost investor returns over time.

2. Upstart

Upstart works with banking partners to provide unsecured personal loans at fixed rates to its customers. The company stands out from other lenders by how it screens loan applications, relying on an artificial intelligence screening system created by its founders, who are tech industry veterans. Instead of depending on the traditional FICO credit system, it uses AI to determine whether to make a loan. Its process has led to more than $13.6 billion in loan originations as of June 2021, with 71% of the loans occurring through Upstart's fully automated process.

The company continues to expand its service to additional lenders. Moreover, it recently expanded the types of loans it handles to include auto loans. Now, Upstart Auto Retail acts as both sales and loan origination software, lines of business that could dramatically boost revenue over time.

For now, total revenue stood at $544 million in the first three quarters of 2021. This increased by 270% compared with the first nine months of 2020. This resulted in $76 million in income for the first nine months of 2021, well above the $5 million earned in the same time frame in 2020. Limiting the increase in operating expenses to 219% was the main reason for the massive profit growth.

Analysts do not expect Upstart to maintain its 2021 growth rate. Nonetheless, if it comes close to meeting the consensus estimates for 2022 revenue growth, now at 49%, it could help boost the stock.

Another reason the stock could rise is its recent history. Although Upstart's stock price surged 270% in 2021, it fell by almost 70% from the October peak. A broad-based tech sell-off and a high multiple likely explain this decline. Upstart now sells at a P/S ratio of 18 after trading for over 60 times sales as recently as September.

Nonetheless, the lower valuation could make it more attractive to investors who want to buy into this growth story. With revenue growth levels staying elevated, Upstart stock is poised for further growth.

Will Healy has no position in any of the stocks mentioned. The Motley Fool owns and recommends, ServiceNow, Inc., and Upstart Holdings, Inc. The Motley Fool has a disclosure policy.

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