DocuSign (DOCU -1.64%) and Upstart (UPST -1.99%) both posted great results in their most recent quarters, yet their stock prices have not reflected that. Investors' abnormal, sky-high expectations have left these stocks on sale. Here's why both of them still have significant upside.
DocuSign's massive opportunity
DocuSign is down 60% from its highs following investors' overreaction to its lower billings in Q3 of 2021. Despite that, the company is still healthy and growing. Its main product enables its 1.1 million global business customers to sign and collect signatures electronically, making a previously pen-and-paper process faster and easier. With just $1.5 billion of the $50 billion digital signature and agreement market in its grasp, DocuSign enjoys an enormous, still-growing market opportunity.
As that market expands, so does the company. From Q3 2020 to Q3 2021, its subscription revenue rose 50%. Overall revenue grew 35% in 2019 and 39% in 2020, and management expects 49% growth for 2021.
International revenue currently makes up only 23% of its total revenue, but it's growing very quickly – 68% year over year in the latest quarter. To keep enjoying that growth, DocuSign needs to keep an eye on regulatory risk abroad; some of the countries where it's currently growing fastest are debating whether electronic signatures are too prone to fraud.
DocuSign is trying to lock in its place in the market through its analytics tools, which its primary competitor, Adobe (ADBE -0.19%), lacks. Agreements between two parties often require extensive and sometimes expensive reviews. DocuSign Analyzer uses A.I. to determine risk and summarize the main points of the agreement. That exclusive feature's helping DocuSign land and keep customers: Existing clients spent 21% more year over year in Q3 2021, up from 17% in Q3 2020, suggesting that DocuSign's staying healthy despite rising competition.
Even so, the company isn't immune to the pandemic's effects. As businesses rushed to go digital, they pulled demand for DocuSign's services forward; the company grew faster than expected last year but slower than expected this year around, leading to the slower growth and smaller billings in Q3 that dismayed investors. But while the stock has spiraled downward, the company's still firing on all cylinders. As DocuSign gets bigger, growth will naturally slow – but it's clearly not coming to a halt.
Upstart's even bigger opportunity
Upstart took off like a rocket upon its December 2020 IPO, and it remained a market darling throughout 2021. In its Q2 2021, it beat analysts' earnings-per-share estimates by 148% and raised guidance for the full year. Investors were thrilled, driving the stock price up 187% to an all-time high. But the company couldn't sustain that second-quarter outperformance, and the overall market soured on growth stocks, slashing Upstart's shares by more than 60%. This gives the stock a more attractive valuation for its strong competitive advantages and massive market opportunity.
Upstart is an artificial intelligence-based lending platform. Its algorithm takes thousands of data points to determine whether or not someone can qualify for a loan. Currently, most banks rely on FICO scores to make those judgments. Upstart claims that 80% of Americans have never defaulted on a loan, yet FICO scores say that only 48% of them are qualified to receive a loan. Upstart's trying to target the 32% of eligible borrowers that FICO leaves out. Upstart bases its judgments on a much larger data set than FICO uses, giving banks a better picture of each potential loan's true risk – and allowing more people to qualify for loans.
Banks pay Upstart referral fees in exchange for this up-front safety screening. Typically, Upstart qualifies a person for credit, then refers them to one of its bank partners to originate that loan. That bank pays Upstart's small referral fee on the loan principal. Upstart aims to help banks issue more loans with similar or better default rates.
Upstart has a huge market opportunity. Currently, it's primarily tackling personal loans, referring $8.9 billion in loans over the trailing 12 months – just under 10% of an $81 billion market. But the company plans to expand into the auto and mortgage loan space, which would increase its total addressable market to $5.2 trillion. A large addressable market does not mean that a company will succeed, but when the company is growing within an expanding market, that can be a great signal.
Large banks could create their own algorithm and compete directly with Upstart – but they'd struggle to match its current head start. The longer AI algorithms are in use, and the more data they collect, the smarter they get. Upstart has years of data to refine its algorithm, giving potential rivals a high hurdle to clear if they want to catch up.
Two stocks, two buys
Upstart and DocuSign could continue to suffer from the market's overall skepticism toward growth stocks. But buying right now could pay off when investors look back years down the road. Both stocks' current slump provides an opportunity for investors to buy these stocks – and their strong competitive advantages in large, growing markets – on sale.