There's reason to believe we're currently in a tech stock correction. The S&P 500 Index is up roughly 5% over the past year, as of this writing. By contrast, the tech-heavier Nasdaq Composite Index is down 6% over this time. Moreover, while the S&P 500 is down 8% year to date, the information technology sector of the S&P 500 is down far more -- almost 16% so far in 2022. From these stats (and others not mentioned here), we see that tech stocks are underperforming other sectors of the market.
To be clear, even with the recent underperformance in tech stocks, I personally see relatively few bargains. But there are a few stocks in my portfolio that I've happily bought more of as their prices have come down, namely Upstart Holdings (UPST -2.04%), Airbnb (ABNB 2.04%), and PubMatic (PUBM). Here's why.
Upstart: A wider moat than you'd think
Typically, I wouldn't build a position in a company like Upstart. I tend to build larger positions in more established companies, and Upstart is still in the early stages of its journey. It's only 10 years old, having been incorporated in 2012. And it went public only in late 2020.
Upstart partners with banks and credit unions and uses artificial intelligence (AI) algorithms to determine a consumer's creditworthiness, doing away with the need for the credit score. It's had great success to date -- full-year 2021 revenue increased an astounding 264% year over year to $849 million.
However, the credit market is cyclical and has generally only trended upward since Upstart's founding. An economic recession could trigger a decline in the credit market and also put pressure on consumers with high debt levels. How would Upstart's business perform during that stage of the credit cycle? The simple answer is that we don't know because Upstart's never been in that situation. In other words, its business model hasn't been thoroughly tested in all economic situations -- reason for concern.
That said, Upstart's "moat" (competitive advantage) is wider than you'd think for a company so young. It ended 2021 with 42 bank and credit union partners, and it's added at least two more partners in 2022 so far. These partners originated over 1.3 million loans in 2021. This means that Upstart's AI, while it still has to prove itself over time, has ample data to pull from to improve any deficiencies with its algorithm. And it's more data than most banks could compile on their own, making Upstart's software valuable.
Upstart's business is weighted heavily toward personal loans. But it's quickly expanding into auto loans and someday hopes to be a software tool for mortgages as well. In short, results have been promising to date, its competitive advantage is strong, and its future opportunity is massive. For these reasons, I've eagerly dollar-cost averaged my position in Upstart so far in 2022.
Airbnb: I'm sleeping soundly for the next decade
Like Upstart in the lending industry, Airbnb is chasing a multitrillion-dollar travel industry opportunity. However, I would rank Upstart's potential upside above that of Airbnb for a simple reason. Right now, Upstart has a market capitalization of just $7.4 billion compared with a market cap of $109 billion for Airbnb. If it's this big already, I readily question just how much bigger Airbnb could be in 10 years.
Airbnb's ceiling may not be as high as that of smaller companies like Upstart. But it more than makes up for this with its floor, in my opinion. Few companies are as sure as Airbnb, and this reality helps me not fret about my position. In a decade, I'm confident the stock will be higher.
Airbnb has two powerful things going for it right now. First, the company ended 2021 with a record number of spaces listed on its platform. Management prioritized this supply growth by overhauling the host onboarding process and by running an ad campaign aimed at hosts. Now, keep in mind that an increase in supply can be bad if it's not met with consumer demand. The law of supply and demand says prices go down if supply growth outpaces demand growth.
However, this isn't what's happening. The second thing in Airbnb's favor right now is that its average daily rates (ADR) are within 4% of their all-time high. In the fourth quarter of 2021, ADR was $154 per night, compared to $161 per night in the second quarter, when ADR was at its all-time high. However, Q4 ADR was up 20% from the comparable quarter of 2020, which suggests Airbnb is in for a bumper 2022. In short, consumer demand for Airbnb's spaces is outpacing growth in supply.
The growth in demand for Airbnb's platform is a trend that I don't see abating in the next decade. And as the company captures this opportunity, I expect my shares to increase in value.
PubMatic: A top small-cap opportunity
If you're looking for a small-cap company that's founder led, growing fast, profitable, with a strong balance sheet, and winning in an important growth industry, then PubMatic is the stock for you.
Consider that connected TV (CTV) is a hot growth industry because consumers are ditching traditional TV service providers. And digital advertising is simultaneously displacing traditional advertising. Here are some stats: According to eMarketer, in 2021, programmatic digital ad spend soared 41% year over year to $106 billion. The Interactive Advertising Bureau says one of the fastest-growing channels for digital ads was digital video, increasing nearly 51% from 2020 to $39.5 billion. And GroupM predicts CTV ad revenue will nearly double from 2021 through 2026.
Programmatic advertising on digital video and CTV platforms is clearly a hot industry, and it's entirely inside PubMatic's wheelhouse. And this little $1.3 billion company appears to be winning this big space. For example, consider that PubMatic ended the first quarter of 2021 with 80 CTV publisher customers (as a sell-side platform, it partners with publishers, not advertisers). Just nine months later, it had 167 -- more than doubling this part of its customer base in under one year.
More importantly, PubMatic's customers are spending more -- a lot more -- over time. In 2021, the company's net dollar-based retention rate was 149%. In other words, if you were a PubMatic customer who spent $1 in 2020, you spent $1.49 in 2021. Few companies see customer spending grow this fast, clearly suggesting PubMatic is earning their business.
Perhaps PubMatic's special sauce is that it has three co-founders who are still with the company -- a rarity. And these co-founders own a lot of PubMatic stock, aligning their financial interests with yours and mine. Specifically, CEO Rajeev Goel owned 4.9 million shares directly and indirectly at the end of 2021, which was 8.7% of the fully diluted share count.
This undoubtedly gives PubMatic's management an ownership mentality, and maybe this is why the company errs on the side of financial conservatism. The company has almost $160 million in cash, equivalents, and marketable securities and zero debt. This balance sheet, coupled with a 25% net profit margin in 2021, means it's highly unlikely PubMatic will find itself in a financial pinch anytime soon, no matter what the economy throws at it.
With so much going for it, it shouldn't be surprising that I recently doubled my position in PubMatic stock.
Approach corrections the correct way
If you're looking for the smoothest ride possible in the stock market, buy an index fund. This vehicle is less prone to volatility. But if you're seeking the market-beating upside potential of individual stocks, corrections are beautiful opportunities. You'll often find great companies selling at a far greater discount than you would get with an index fund.
That's what I believe is going on with Upstart, Airbnb, and PubMatic. These stocks are down 78%, 22%, and 63% from their respective all-time highs -- a far greater sell-off than the market average. This is to my advantage as I try to buy stocks in great companies at good values. Embracing this short-term volatility is how I leverage corrections to my long-term advantage.