Investors have had a rough week as the market has repeatedly threatened to dip into correction territory, defined a 10% decline from its high. At Wednesday's prices, the S&P 500 is already down 8.7% in 2022 with interest rate hikes on the horizon and inflation still looming.
A sharp drop can be unsettling. But don't panic -- in the long run, it can be an opportunity. If you're looking to take advantage of this week's volatility, start with Upstart Holdings (UPST -1.97%), Block (SQ -2.28%), and MercadoLibre (MELI -1.01%).
1. Upstart Holdings: Plunging valuation
Upstart was one of the biggest investing stories of 2021, zooming as high as 18 times its IPO price in less than a year. But shares are now back under $100, and the stock is trading at 97 times its trailing 12-month earnings. That's not cheap by any measure, but it might be an appropriate premium for a stock with Upstart's potential.
Image source: Getty Images.
Upstart offers a new way to assess credit risk, using artificial intelligence to model thousands of data points that aren't captured by the traditional FICO score. Instead of relying on a small set of broad categories, Upstart's platform includes many more factors, such as education and employment history.
It's been a winning formula, and the company has posted outstanding growth over the past four quarters since it went public in late 2020. In the third quarter, revenue increased 250% to $228 million, beating estimates, and net income nearly tripled to $29 million. Profitability is a key attraction here, since new growth companies typically aren't profitable. Investors didn't love the report, since management guided for slowing growth in the fourth quarter. But that amounts to about 200% year-over-year growth at the midpoint, which is still impressive.
Upstart made a big jump into auto loans last year, and management has said that it would enter mortgages in 2022, a much bigger market than personal loans and car loans combined, at $4.5 trillion. With its market opportunities and at this price, Upstart looks like a buy.
2. Block: A supersized fintech ecosystem
Block, formerly Square, has expanded its services into two distinct, growing ecosystems. Its sellers business is back to growth after the pandemic, and it's offering new features for its small-business clientele. The sellers business revenue increased 44% year over year in the 2021 third quarter to $1.39 billion.
However, Block's main growth engine is its Cash App business. Cash App has developed from a simple peer-to-peer payments service into a complete personal finance app, including stock and Bitcoin trading, and it's even chartered its own bank. Cash App revenue increased only 16% year over year in the third quarter to $2.39 billion, and that low increase was related to Bitcoin trading, which heavily influences Cash App revenue. Without Bitcoin, revenue increased 33%.
Image source: Getty Images.
The company changed its name to Block late last year to signify its pivot toward cryptocurrency and blockchain technology. It also sees the new name as amplifying its goals of building and creating community, but the connection to crypto is significant, because the company could be going down that path. Jack Dorsey quit his job as CEO of Twitter and is focusing on Block, and he is committed to Bitcoin as a native internet currency.
Block typically trades at a super-high valuation, and even after plunging 31% since New Year's, shares trade at 111 times earnings. There's definitely a lot of growth built into that valuation -- but there's also a lot to expect from this growth stock.
3. MercadoLibre: An e-commerce super-stock
E-commerce has exploded with the pandemic, and shoppers around the world are settling into digital routines that support online shopping and digital payments. MercadoLibre is a heavyweight in both of these areas. Headquartered in Argentina, the company operates in 18 Latin American countries, serving a population of more than 600 million people. This region has one of the fastest rates of internet penetration in the world, and MercadoLibre has been benefiting, growing by leaps and bounds.
It posted triple-digit growth throughout the pandemic, and although it's slowing down as lockdowns are mostly over, it's still posting high growth. In the 2021 third quarter, revenue increased 73%, total payment volume grew 59%, and gross merchandise volume increased 30%.
It's been widening its reach lately, moving from its core foundation of e-commerce into a broader range of financial and tech services. Last month, it acquired Chilean digital payments company Redelcom.
MercadoLibre has also been getting its feet wet in cryptocurrency, taking a small position in Bitcoin last year. It recently took a deeper dive, announcing an investment in Brazilian cryptocurrency exchange mercadobitcoin.com.br, as well as Paxos, a blockchain development company in Brazil. Andre Chaves, senior vice president of strategy and corporate development, said, "As a leading technology company, we are actively evaluating the various innovations and opportunities around this market as it evolves, aiming to be a core participant in this disruption." That will be an interesting development to follow as MercadoLibre expands its leadership in fintech.
MercadoLibre, too, is still richly valued; even though it's down by about 50% since peaking in January 2021, its forward-looking P/E ratio is 114. But that might be worth it for the opportunity this dynamic business represents.
