The Nasdaq Composite index is down more than 25%, putting it solidly in bear market territory. This is an uncomfortable place for most investors to find themselves in. But for investors buying stocks with time horizons of three years or longer, it can also be a place for opportunity.
A study of past bear markets has shown that the downcycle lasts an average of about 10 months. The study also showed that the average time to recover the losses was 26 months (although the average recovery time in the modern era of the market is more like 17 months). Using those general guideposts, long-term investors (those who hold stocks for at least three to five years) should feel confident that buying into the market at any time will lead to a positive return eventually.
When it comes to individual stocks, this idea also holds true, at least if you pick the right stocks to begin with. I've currently got my eye on two stocks in particular: The Trade Desk (TTD 0.69%) and Upstart (UPST -0.85%). Let's find out a bit more about these two growth stocks with bear market returns.
1. The Trade Desk
Advertising used to be designed to be viewed by a broad audience in the hopes of reaching the few who might be interested. These days, ads are much more targeted to specific audiences and delivered in much more specific ways and often done so in an automated fashion. That's great for the ad buyers, as the ads tend to produce noticeably better results for less expense.
The Trade Desk is one of the companies leading this targeted advertising revolution. Its demand-side platform lets ad buyers purchase space on websites, podcasts, or connected TV through programmatic ad campaigns. The customers can tweak their campaigns to optimize results and use data gathered by The Trade Desk to increase efficiency.
The Trade Desk's product has been successful and sticky. Over the past eight years, the company has retained at least 95% of its customers every quarter. Customers find value in the product and are happy to increase their spending with it.
In Q1, revenue was up 43% year over year to $315 million. It also posted an adjusted EBITDA margin of 38% but was unprofitable on a GAAP net-income basis for the first time in several quarters. That unprofitability can be attributed to one item: CEO Jeff Green's $66 million long-term performance bonus. Without this one-time charge, The Trade Desk would have had a net income of $51 million, equating to $0.11 earnings per share, up 112% year over year.
The Trade Desk is generating solid results, but it also has the potential for significant growth in the coming years. Streaming TV services have discovered the potential of ad-supported versions to help monetize their services. For example, both Netflix and Walt Disney's Disney+ are looking to add ad-supported options to their streaming services. It's likely The Trade Desk is pursuing a partnership with them.
The Trade Desk's stock is down more than 54% from its 52-week high and trades for about 20 times sales -- the same general range it traded at before its valuation spiked in 2020 and 2021. Investors should feel confident buying this beaten-down stock, as its business is thriving and has plenty of opportunity for growth.
While the FICO score is the industry standard for lenders to assess the creditworthiness of individual consumers, the model has some flaws. It relies on a relatively limited data set to determine creditworthiness and it can sometimes unfairly score potential lending candidates so as to eliminate them or force them to take a higher-interest-rate loan. Upstart management thinks it has a superior alternative and the company offers an artificial-intelligence-powered model that generates a score using hundreds of variables about the loan applicant. It claims to have 75% fewer loan defaults with the same approval rate, showcasing its ability to approve more loans with less risk. The loan applicants also benefit as more are deemed creditworthy and also qualify for lower-rate loans.
Upstart's bank clients love its product, but how does it stack up against the FICO model? Upstart uses a letter grade scale rather than a number -- the most worthy loan candidates get an A+, and the least get an E-. When consumers with a 700 or greater FICO score (which is usually required to get the best loan rates) are given an E- Upstart rating (the lowest score), Upstart found they defaulted on 9.2% of loans. According to Upstart, this means lenders using the traditional FICO score are unknowingly taking greater risks, as the old model leads them to believe consumers are more creditworthy than they actually are.
Upstart has grown quickly. In Q1, revenue rose 156% year over year to $310 million. It was also profitable, posting GAAP earnings of $0.34 per share. However, with interest rates increasing and the economy tightening up, Upstart cut its 2022 revenue outlook from $1.4 billion to $1.25 billion. This guidance cut caused the stock price to drop as much as 63% in the days following the report's release. Upstart stock is now down a whopping 90% from its all-time high.
This sell-off presents an opportunity for those who want to establish a position. Trading at just 4 times sales, Upstart is a bargain for a company operating in a $6 trillion loan origination market opportunity.
Both The Trade Desk and Upstart are fantastic long-term investment opportunities on sale right now. Investors should use the bear market-induced panic to their advantage and scoop up shares of these two businesses before they rebound.