The tech stock sell-off has been ruthless in 2022, giving no high-growth investor a break. The Nasdaq index is down more than 14% in 2022 alone, with many tech stocks falling much harder. On the bright side, this gives investors who measure their time horizon in decades plenty of buying opportunities.
Two of my favorite stocks, Upstart (UPST -0.48%) and The Trade Desk (TTD -0.97%) have both been crushed, falling 66% and 26%, respectively, off their all-time highs. These lower prices look like buying opportunities, especially after they reported strong results. I plan on buying more of both companies within the coming months, and here's why I think you should consider doing the same.
Upstart has an audacious goal: to replace the FICO credit score with a fuller artificial intelligence-based engine that better judges creditworthiness. The company takes in over 1,500 variables and data from 21.6 million repayment events to determine creditworthiness, compared to a handful of variables and the FICO score that large banks use.
So far, the company has executed flawlessly. It currently has 42 banking partners -- up from 31 in just the third quarter of 2021 and 10 in Q3 2020 -- seven of which have no FICO requirements for their applicants, which shows that their reliance on the FICO score is decreasing. As a result, the company's financials have skyrocketed. In Q4, Upstart's revenue soared 252% year over year to $305 million, while its net income grew 5,790% year over year (yes, you read that right) to almost $59 million. To add a cherry on top, the company's free cash flow for 2021 reached $153 million -- representing 18% free cash flow margins.
The company also took steps in decreasing some of its risks: its substantial customer concentration. In 2020, one banking partner accounted for 63% of revenue, but in 2021, represented just 56%. While the company still depends heavily on that customer, it shows that Upstart's rapid adoption is improving this risk.
Upstart is disrupting a massive market, and its opportunity is only growing larger. The company recently launched its AI-based auto loans business with much success. In Q4 2020, the company originated its first auto loan, but by the end of 2022, Upstart expects that its auto loans will contribute $1.5 billion in loan volume. This brings its addressable market to a value of $6 trillion -- which is the annual worth of all personal, mortgage, business, and now auto loans in the U.S. The company currently has less than 0.2% of that total opportunity, meaning Upstart still has a long runway ahead.
With this jaw-dropping execution so far, the company's future looks incredibly bright, and with shares trading at just 14 times sales right now, it might be wise to pick up a few shares.
2. The Trade Desk
The Trade Desk has become an industry leader on the buy-side of the advertising technology space, but has only scratched the surface. In 2021, the company ran $6.2 billion in advertising spend through its platform, which is peanuts compared to the $725 billion spent annually on ads globally.
The company helps advertisers reach their target audience effectively by using AI and machine learning. It then connects advertisers with companies, called publishers, that sell ad space. As the market leader, the company has the most data, which helps businesses give valuable suggestions to advertisers. This dominance helped the company post over $396 million in Q4 revenue, a 24% year-over-year boost.
The company is developing new products that push forward the adoption of digital advertising. This method of advertising is much more valuable to advertisers because it is easier to monitor ad engagement compared to traditional techniques like billboard advertising. The company launched Unified ID 2.0 (UID2) in 2021, which allows businesses to target their ads at specific consumers while maintaining the privacy and security of users. UID2 does not rely on cookies to track consumers, and this cookieless method of monitoring has been gaining steam. Cookie-based advertising is being abandoned by Apple and Alphabet, so this shift was critical for The Trade Desk.
Moreso, the usage of UID2 has succeeded over advertising methods incorporating cookies: With one of The Trade Desk's customers, the advertiser saw a 1,000% return on ad spend while reaching 40% more consumers.
Shares are highly valued at 31 times sales, but the company's industry dominance and growth potential are simply too large to ignore. If the valuation scares you, consider dollar-cost averaging into a full position, but The Trade Desk has the potential to continue growing at a steady pace over the next decade and be an incredible investment over that time.