Legendary investor Peter Lynch once said, "All you need for a lifetime of successful investing is a few big winners, and the pluses from those will overwhelm the minuses from stocks that don't work out." That's because the worst thing that can happen when you buy a stock is a 100% loss, but there is no limit on the upside. The right stock can easily grow tenfold in value.
With that in mind, businesses like Upstart Holdings (UPST -1.25%) and Latch (LTCH) are growing quickly, and I think these two stocks could each deliver 10x returns for shareholders over the next decade. Here's why.
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1. Upstart Holdings
Upstart is a fintech company on a mission to make consumer credit more accessible. Traditional lending models are built around the FICO score (created and managed by Fair Isaac), a metric calculated from no more than 20 variables. Unfortunately, the limited scope of that data means banks often fail to correctly quantify an applicant's risk when making lending decisions. As a result, some creditworthy borrowers are excluded from the system, while others are charged too much interest because they must subsidize the portion of borrowers who will inevitably default.
In an effort to modernize that system, Upstart leans on big data and artificial intelligence (AI) to help lenders quantify risk more precisely. Its platform captures over 1,500 data points per application, and it measures those variables against 21.6 million repayment events (and counting). That creates a network effect because each time a borrower makes or misses a payment, Upstart's predictive engine gets a little smarter.
Compared to traditional credit models, internal studies have shown that Upstart's AI-powered platform can approve 173% more borrowers while keeping loss rates constant, or it can reduce loss rates by 75% while keeping approval rates constant. No matter how you cut it, that means lenders make more money, and that value proposition has Upstart growing like wildfire.
In 2021, the number of bank partners on its platform more than tripled, and transaction volume surged 241% to $11.8 billion. In turn, revenue skyrocketed 264% to $849 million last year, and the company generated free cash flow (FCF) of $153 million, up 15-fold from $10 million in 2020. But this disruptive fintech company is just getting started.
Upstart currently works in personal and auto lending, two verticals collectively valued at over $820 billion. But management sees room to expand into industries like mortgages and small business loans, which would add more than $5 trillion to its total addressable market (TAM). In short, Upstart has captured less than 2% of its current TAM and far less than 1% of its potential TAM. But if this $8.5 billion business continues to grow its top line quickly, I think the stock could jump tenfold over the next decade.
2. Latch
Latch specializes in smart building technology. Its platform comprises a range of devices like door-mounted smart locks, intercoms, and delivery assistances, all powered by LatchOS software. Latch's technology allows apartment managers to control access permissions remotely. It creates a premium experience for tenants, allowing them to unlock doors, admit guests, and control smart home devices from a mobile app.
Collectively, Latch estimates the efficiency created by smart lock technology can cut expenses by $100 to $300 per apartment per year and that the benefits can boost revenue by $200 to $500 per apartment per year. Moreover, while most rivals address only part of the smart building experience, Latch provides a comprehensive lineup of hardware, software, and services that meet all of its clients' needs.
Not surprisingly, that competitive edge has driven strong demand. Today, 3-in-10 new apartments in the U.S. are equipped with Latch technology, but its smart locks are also being used to retrofit existing buildings. Collectively, strength across that industry helped Latch grow revenue by 129% to $41.4 million in 2021. Total bookings jumped 118% to $360.2 million, implying strong future revenue growth. On a less optimistic note, Latch is still unprofitable on a generally accepted accounting principles (GAAP) basis, and it generated negative FCF of $115 million last year. However, with $284 million in cash and investments on its balance sheet, Latch can afford to invest aggressively in growth for another year or two without taking on debt. Management has previously indicated that the company would achieve positive FCF by 2023.
Looking ahead, Latch has plenty of room to grow its business. It has booked roughly 590,000 apartment units across North America, but management puts its TAM at 32 million units. In other words, Latch has captured less than 2% of its TAM in apartment buildings. But the company recently expanded into commercial office spaces as well, which means its TAM is getting bigger. If Latch continues to execute, shareholders could see tremendous returns during the next decade. I think this $630 million business could grow tenfold (or more) over that time period.
