The S&P 500 has fallen 14% from its high as investors have taken steps to hedge their losses in an uncertain macroeconomic environment. As a result, the price-to-earnings (P/E) ratio of the benchmark index sat at 20.7 at the end of May, a bit cheaper than its 10-year average of 22.9 times earnings, according to information from Nasdaq Data Link. That doesn't mean the current downturn will end tomorrow, but it does suggest there are bargains to be found.
With that in mind, MercadoLibre (MELI 8.27%) and Upstart Holdings (UPST 2.72%) look like compelling buys. The stocks have fallen 57% and 89%, respectively, but both businesses are growing at a blazing-fast pace. Here's what you should know about these two tech growth stocks.
1. MercadoLibre
MercadoLibre is the largest online commerce and payments ecosystem in Latin America, a region that ranks among the fastest-growing markets in terms of internet penetration and e-commerce adoption. MercadoLibre's ecosystem of integrated services -- logistics, advertising, and financing -- has further solidified its dominant position, accelerating the flywheel that powers its business by incentivizing merchants to join the marketplace.
To that end, the company benefits from a classic network effect. Each new seller brings new inventory to the marketplace, creating incremental value for every buyer. And each new buyer brings more spending power to the marketplace, creating incremental value for every seller. That virtuous cycle has fueled impressive financial results. Over the past year, revenue climbed 69% to $7.9 billion, and the company posted a generally accepted accounting principles (GAAP) profit of $3.67 per diluted share, up from a loss of $0.31 per diluted share in the prior year.
In the most recent quarter, MercadoLibre continued to execute on a solid growth strategy. It expanded its merchant-facing credit business into Chile; it added crypto support to its Mercado Pago wallet in Brazil; and it ramped up its credit card offering across several geographies. In addition, its managed logistics network handled 91% of shipping volume, up from 80% in the prior year. Those services make MercadoLibre's commerce and fintech platforms even stickier.
Here's the bottom line: Online retail sales are expected to reach $160 billion in Latin America by 2024, up from $85 billion in 2020. That also implies strong growth in digital payments. The same trend is expected to play out offline. By 2024, payment cards will surpass cash in terms of transaction volume at brick-and-mortar locations, and digital wallets will nearly double their market share, according to WorldPay. All of those trends bode well for MercadoLibre. And with the stock trading at a reasonable 5.3 times sales, now looks like a great time to buy a few shares.
2. Upstart Holdings
Upstart operates an artificial intelligence (AI)-powered lending platform designed to help banks quantify risk. The company believes that traditional underwriting models incorporate too little data, which often leads to poor credit decisions. There is certainly some truth to that. Fair Isaac's FICO score has long been the heart of the lending industry, but that three-digit number is calculated from no more than 20 variables. In turn, some creditworthy borrowers are rejected, while many others pay too much interest to subsidize those who eventually default.
To make the system more efficient, Upstart captures over 1,500 data points per borrower and measures them against past repayment events. In doing so, its platform leans on artificial intelligence to help lenders predict fraud and defaults more precisely. In fact, internal studies have shown that Upstart's AI models can reduce loss rates by 75% while keeping approval rates constant, or they can boost approval rates by 173% while keeping loss rates constant. The lender wins in either scenario, and that has fueled impressive financial results.
Over the past year, revenue skyrocketed 271% to $1 billion, and net income jumped more than tenfold to $158 million. On a less optimistic note, free cash flow dipped into negative territory as the company purchased loans and placed them on its balance sheet. But management plans to discontinue that practice, according to The Wall Street Journal, so shareholders shouldn't lose sleep over Upstart's credit exposure.
However, investors should monitor the credit quality of Upstart-powered loans. Its AI models have never been tested during a down credit cycle, and if they fail to outperform FICO-based models, lenders are less likely to adopt the platform. But the early results are promising, as internal data suggests that Upstart's AI outperforms traditional underwriting models across every FICO score threshold.
Going forward, Upstart has plenty of room to grow its business. The company started with personal loans but has already expanded into the auto-lending vertical, bringing its addressable market to $860 billion. Moreover, Upstart plans to enter additional verticals in the future, including the $4.5 trillion mortgage-origination market. In short, the company appears to have a differentiated product in a massive industry. And with shares trading at a reasonable 4.1 times sales, I think you'll regret not buying this monster growth stock on the dip.
