When it comes to tech stocks, mega-caps like Apple and Amazon tend to attract attention. Due to compelling products and exposure to the consumer space, one can understand this focus.
However, this attention may come at the expense of lesser-known tech stocks not directly focused on the American consumer. Investors looking for such companies should consider taking a closer look at tech growth stocks such as StoneCo (STNE 0.37%) and Upstart Holdings (UPST 3.66%).
As a company that operates only in Brazil, StoneCo is not a well-known company for U.S. investors. These investors also likely do not know that Brazil's central bank has enacted policies that make its country the center of Latin American fintech, a sector that must serve a large population that often lacks bank accounts and credit cards. Consequently, fintechs like StoneCo have attracted pre-IPO interest from Warren Buffett's Berkshire Hathaway.
Buffett's team may have favored this stock because it has built a similar ecosystem to Block's Square ecosystem in the developed world. It provides businesses with the IT infrastructure to handle their fintech and financial management needs. Because Brazilian fintechs can loan money without a bank, it can provide capital more efficiently.
StoneCo also stands out with customer service. It takes a "no bureaucracy" approach to customer service and can quickly deploy personnel where needed. This allows its reps to resolve issues in a swift, personalized manner.
However, pandemic-related restrictions, rising inflation, and increasing reserve requirements weighed on this once high-flying stock in 2019. Over the last 12 months, it has dropped by around 85%.
Nonetheless, activity continues to increase. Total payment volume rose 31% during 2021 to over 275 billion reais ($54.6 billion). That volume led to 4.8 billion reais ($950 million) in revenue, a 45% increase. Unfortunately, since all expense categories surged faster than revenue, adjusted net income dropped 79% year over year to just 203 million reais ($41 million).
Still, lockdown restrictions have faded, and the tech stock appears to have priced in inflation concerns. Moreover, the price-to-sales (P/S) ratio has dropped below four, near record lows for the stock. Hence, StoneCo appears on track to further fintech in Brazil while it offers a massively discounted buy price to investors.
Upstart offers a loan evaluation tool. It uses artificial intelligence (AI) to evaluate loan applications, competing directly with Fair Isaac Corporation's FICO score. It originally began with personal loans but has since expanded into auto lending. It also plans to evaluate prospective mortgages and business loans as soon as next year.
Upstart earns money by collecting a fee for the evaluations. This leaves it with no direct loan risk. However, bad loan decisions could have severe consequences. The majority of its loan volume comes from New Jersey-based Cross River Bank, and it could become vulnerable should its relationship with Cross River sour. Moreover, the model has not faced the test of a rising interest rate environment, and Fair Isaac could add AI functionality to improve its model.
Still, Upstart approves 70% of loans instantly. Additionally, the Consumer Financial Protection Bureau said its model approved 27% more loans than competing models, including nearly twice as many consumers with FICO scores between 620 and 660.
The model seems to attract more worthwhile interest. In 2021, Upstart reported $849 million in revenue, 264% higher than year-ago levels. This allowed the company to earn $224 million in adjusted net income, up from $17.5 million in 2020. Such profitability is highly unusual for growth tech stocks. And in 2022, if company projections hold, Upstart will bring in about $1.4 billion in revenue, about 65% above 2021 levels.
Despite rapid growth, Upstart has dropped by almost 80% from its 52-week high. But its price-to-earnings ratio of 59 is close to record lows, and if it can handle a rising-rate environment, its expansion into new markets and rapid revenue growth could bring outsize returns.