Last year, the stock market proved virtually unstoppable, with a peak decline in the benchmark S&P 500 of just 5%. But 2022 has been a different beast altogether.
Both the S&P 500 and iconic Dow Jones Industrial Average reached double-digit percentage declines in March, while the growth-focused Nasdaq Composite (^IXIC 0.14%) shed as much as 22% of its value between mid-November and mid-March. This 22% decline officially put the Nasdaq in a bear market.
With the pandemic-related market meltdown that occurred over five weeks in the first quarter of 2020 still fresh in many investors' minds, just hearing the phrase "bear market" can be unnerving. However, history has shown time and again that putting your money to work during a bear market is a genius move. That's because every bear market is eventually erased by a bull market rally. In other words, a bear market is the opportune time for long-term investors to go shopping.
Quite a few high-quality companies are now valued at a discount as a result of the swoon in the Nasdaq Composite. What follows are three unstoppable stocks you'll regret not buying on the dip.
The first unstoppable stock you'll be kicking yourself over if you don't buy the dip is cloud-based lending platform Upstart Holdings (UPST 3.44%). Shares of the company have fallen by nearly 80% from their all-time high set last year.
The big worry skeptics have with Upstart is what effect rapidly rising interest rates might have on its growth potential and bottom line. With the U.S. inflation rate hitting a 40-year high of 8.5% in March, it's pretty evident that the nation's central bank is going to aggressively hike rates in the months that lie ahead. This could quell demand for all types of loans, and therefore affect Upstart's operating model. However, it's my contention that these concerns are largely overblown.
One of the biggest advantages of Upstart's platform is that it's driven by artificial intelligence (AI). Without digging too far into the weeds, Upstart's lending platform relies on data from all previously vetted loans to quickly approve or deny an applicant. Approximately two-thirds of loan applicants receive an immediate response with Upstart, which saves consumers and businesses time and money.
In addition to being fast, Upstart's AI-driven platform has helped expand loan availability to applicants who wouldn't have qualified under a traditional vetting process. Despite broadening the scope of loan approvals, Upstart-approved applicants aren't exhibiting a drop-off in on-time payments. This makes it even more likely that lending institutions will lean on Upstart's platform as interest rates rise.
Investors should also be aware that Upstart has no credit exposure. During the fourth quarter, 94% of revenue was derived from fees and services tied to lending institutions. If the U.S. economy does contract, Upstart's not on the hook for any loan delinquencies.
Perhaps most exciting of all, Upstart's acquisition of Prodigy Software in 2021 allows it to push into the much larger auto loan origination market. There are ample opportunities for Upstart to thrive, and with the company highly profitable on a recurring basis, now is the perfect time for opportunistic investors to strike.
Another unstoppable stock you'll regret not buying on the dip is cloud-based programmatic ad-technology company PubMatic (PUBM -0.25%). Shares of this fast-growing small-cap company are down 63% since hitting their all-time high in March 2021.
The big concern with PubMatic, like Upstart, is the likelihood of an economic slowdown caused by rapidly rising interest rates. Advertising spending tends to boom when the U.S. and global economy are expanding, and it tapers off when economic contractions and recessions rear their head. Thankfully, PubMatic has a number of factors working in its favor that should lead to sustainable annual sales growth in excess of 20%.
First of all, advertising spending is pushing away from print and toward various digital channels. PubMatic specializes in selling digital display space for publishing companies. Whereas global digital ad spend has been growing by a little over 10% annually, PubMatic delivered an organic growth rate of 49% in 2021. In each of the next two years, look for its organic growth to come in around 25%.
PubMatic's platform also leans on machine-learning algorithms that are designed to keep advertisers and its clients happy. These algorithms aren't necessarily placing the highest-priced ad into an available display space. Rather, PubMatic's platform aims to put the most relevant content in front of users, which keeps advertisers happy and allows publishers to command better ad pricing power over time.
Best of all, PubMatic built its cloud-based infrastructure and therefore doesn't have to rely on third parties. These investments are beginning to pay off in the form of higher full-year gross margin as infrastructure utilization increases.
This highly profitable company looks like a screaming buy on any sizable dip in the Nasdaq.
A third and final unstoppable stock that makes for a no-brainer buy during a Nasdaq bear market dip is Alphabet (GOOGL -1.10%) (GOOG -0.96%). Shares of the company have retraced 16% since mid-November.
Alphabet, the parent company of internet search giant Google and streaming platform YouTube, is suffering from the same uncertainties plaguing Upstart and PubMatic. Alphabet is an advertising-driven company, and any economic slowdown would be viewed as a negative for domestic and global ad spend.
On the other hand, Alphabet isn't your run-of-the-mill advertiser. For instance, internet search engine Google has accounted for 91% to 93% of all global internet search for at least the past year, based on data from GlobalStats. With such a dominant presence, it's no surprise that Google is able to command such incredible ad-pricing power. With the exception of a single quarter during the height of the pandemic, Google has consistently grown sales by a double-digit percentage on a year-over-year basis.
But what investors should realize is that Alphabet's operating cash flow growth is about far more than just internet search. YouTube, for example, has become the second most visited social site on the planet, based on monthly active users. YouTube's annual ad revenue run rate is nearly up to $35 billion.
There's also Google Cloud, which is Alphabet's cloud infrastructure arm. Google Cloud clocks in as the global No. 3 in cloud infrastructure ad spend and has grown sales by 45% to 50% pretty consistently. The key here is that cloud service margins are notably higher than advertising margins. Google Cloud should play a big role in potentially doubling Alphabet's operating cash flow per share by mid-decade.
Among the FAANG stocks, an argument can be made that Alphabet is currently the best deal.