Investing in index funds can be rewarding. They usually offer exposure to a broad range of the stock market, or at least a very diverse portion of it, making them a sensible option for most investors. However, for those willing to assume a bit more risk in their investments, picking individual stocks can generate returns that far exceed an index fund's return (with the caveat that they can deliver far steeper losses, too).
The Nasdaq-100 technology index is currently trading in bear market territory (down about 24.3% from its 52-week high). Many individual tech stocks are trading down by 50% or more from their 52-week highs. But savvy long-term investors know that times like these present opportunities to grab quality stocks at steep discounts that have little to do with the company's actual performance.
Let's take a closer look at two such companies that I think will recover and double in value from here before the broader Nasdaq-100 does.
Image source: Getty Images.
1. Upstart Holdings
The first step to sourcing high-growth opportunities is to look for companies that sell in-demand products or services. Upstart Holdings (UPST -1.79%) is a fintech company that specializes in helping lenders determine creditworthiness. It has developed an artificial intelligence algorithm that analyzes roughly 1,600 data points on a potential borrower. It's scoring system is far more comprehensive than Fair Isaac's FICO credit scoring system, which uses just a handful of simple metrics.
Upstart's algorithm is also fast; it can process all of that data and deliver an instant decision about 74% of the time, whereas it would take days or weeks for a human to manually make the same assessment. Its thoroughness and speed have made it popular with multiple lending partners that use Upstart's service to help determine who to lend to and who to decline.
Upstart's stock price has fallen about 88% from its all-time high, in part because the stock got caught up in a broader tech sell-off. The stock price is also down because the company last quarter took on about $597 million worth of loan obligations instead of immediately selling those loans to its lending partners. Upstart doesn't normally take on credit risk as part of its operations -- it earns its revenue through fees for originating loans for banks -- so this news really spooked investors.
Company management said this is a temporary symptom of interest rate volatility and determining the proper rate for loans related to its new automotive lending segment. Auto loans are a new offering and the segment is growing at an explosive rate. It is now working with 35 car brands sold in 525 car dealerships and helping them manage sales and originate car loans. The number of dealerships is up 224% from just 162 dealerships a year ago.
Upstart generated $57 million in revenue in 2017. Just five years later, the company expects to collect $1.25 billion in revenue -- a 2,090% jump. Upstart is also profitable, which is rare for a fast-growing tech company, delivering $2.37 in adjusted earnings per share during 2021. The stock trades at a price-to-earnings multiple of 21, which is cheaper than the Nasdaq-100 index's multiple of 25.
The stock only has to recapture a fraction of its pre-sell-off value to double from here, and given its revenue growth rate, there's a good chance investors have been too pessimistic. After all, Upstart could have trillions of dollars worth of opportunities ahead.
Image source: Getty Images.
2. Meta Platforms
Meta Platforms (META -2.41%), the parent company of social networking brands like Facebook, Instagram, and WhatsApp, is also one of the leading developers of the metaverse. This new collection of virtual worlds holds plenty of promise.
Developing the metaverse isn't cheap and Meta said its Reality Labs segment (which manages Meta's metaverse efforts) spent $10 billion more than it took in during 2021 That didn't sit well with investors. The loss is partly to blame for Meta stock losing about 51% of its value since September. In difficult economic times, investors like prudent cash management, not cash burn. Reality Labs lost a further $2.9 billion in the first quarter of 2022, which suggests its full-year metaverse costs could easily exceed 2021's tally.
What investors need to factor in is that these metaverse-related investments should pay off long-term, and are setting the company up to capture what will eventually be a large market opportunity. Some analysts calculate that the metaverse market could be worth $800 billion annually by 2024. More ambitious projections call for a $30 trillion market in the next decade. Both numbers dwarf Meta's investment in the project so far.
Meta has a track record of consistently delivering revenue growth and overall profits since it hit the public markets in 2012. In 2021, Meta generated $117.9 billion in sales and $13.77 in earnings per share, placing the stock at a price-to-earnings ratio of just 14. That implies Meta stock will need to rise 80% just to trade in line with its peers in the tech sector.
According to analysts' expectations, Meta could see a dip in earnings to $11.88 per share in 2022, which is partly due to the expected cash burn in Reality Labs and also the fact the company is still struggling with Apple's privacy changes on its devices. Apple has made it easy for social media users to opt out of having their use and interests tracked. That makes it much harder for apps like Facebook and Instagram to direct targeted ads to the right users (which advertisers pay a premium for). Meta management said it expects the changes could cost the company $10 billion in lost revenue in 2022.
Still, growth is expected to rebound in 2023 and there's a reasonable chance Meta stock multiple will close its gap to the Nasdaq-100. With the value of the metaverse set to soar in the coming years, Meta could see a significant uptick in its stock price, assuming it can monetize its ongoing investment.
