With the broader market dipping in and out of bear market territory (down 20% from its high), it's clear short-term investors cannot make up their minds. However, long-term investors have an advantage: patience. Because they aren't chasing quick returns focused on quarter-to-quarter, long-term investors can afford to adopt a patient approach that looks past current market conditions.
It's this approach that makes investing in Alphabet (GOOG 0.54%), CrowdStrike Holdings (CRWD +3.16%), and Upstart Holdings (UPST +10.04%) prudent during a bear market. All three stocks represent great values at the moment and operate in expanding and vital industries. let's take a closer look at why these three stocks are worth buying at the moment.
1. Alphabet
Alphabet is the parent company of Google, YouTube, the Android operating system, and Google Cloud. The company owns some of the world's most dominant businesses in multiple sectors, but it generates most of its revenue via advertising.
In the first quarter, 80% of revenue was related to its various advertising operations. This is generally not an issue, except when talk of recession heats up or an actual recession takes place. Advertising spending by companies generally gets cut back during recessionary times, and some investors see this and wonder if Alphabet's revenue is going to take a hit.
I'm not one of those investors. It's true that ad spending drops in difficult economic periods. However, I'm not convinced that companies will decrease their spending on YouTube and Google. These platforms provide some venues that allow for very accurate ad targeting and those tightened ad budgets will want to concentrate their spending more where it will get the best returns. Advertising spending will shrink, but Google's products will be the last to feel the sting, not the first.
NASDAQ: GOOG
Key Data Points
Regardless of whether spending drops, the economy will eventually come roaring back. At that time, Alphabet will see an even bigger inflow of advertising dollars as advertisers find out how well it performs, which will send the stock soaring. In the meantime, Alphabet has a $70 billion share repurchase plan that is currently being executed at Alphabet's lowest-ever valuation (when assessed from a price-to-earnings (P/E) standpoint).
Alphabet is a no-brainer buy in this market, and it will reward patient investors handsomely if they hold on to the stock.
2. CrowdStrike
Although ad spending may fluctuate during recessions, cybersecurity spending doesn't. CrowdStrike is a leader in this space with its artificial intelligence (AI)-powered endpoint protection software that secures network access points like laptops or phones. With attacks on the rise, companies have no choice but to bulk up their cyber defenses, regardless of how the business is doing.
With more than 20 modules designed to address customers' various needs, CrowdStrike offers IT teams a wide assortment of solutions. While most customers may start with a few modules, they gradually expand. According to the company, 71% of customers utilize four or more modules, and 19% utilize at least seven.
NASDAQ: CRWD
Key Data Points
This spending expansion is showcased by CrowdStrike's retention rate, which measures how much a customer expands its spending. CrowdStrike's goal is for this number to stay above 120% (meaning a customer spends $120 for every $100 they spent last year), and it met this goal in its fiscal year 2023 first quarter (ending April 30), just as it has for the last four years.
CrowdStrike's annually recurring revenue grew 61% year over year to $1.9 billion during Q1, but this pales in comparison to its total addressable market. By 2025, CrowdStrike expects its current and future offerings to gain access to a $126 billion addressable market.
CrowdStrike operates in an increasingly important industry that is recession-proof, growing quickly, and seeing significant customer expansion. With the stock trading for around 88 times free cash flow, it's a bit expensive, but the growth and opportunity warrant the high valuation.
3. Upstart
People despise being reduced to a number, but that's what Fair Isaac's FICO score does in the lending world. Upstart believes this approach is outdated and uses a new, more comprehensive AI-powered standard to assess credit risk better. Where FICO evaluates a couple dozen credit-risk factors to develop a score, Upstart's grade is determined using hundreds of factors about the borrower.
A study by Upstart that analysts defaults among credit customers with both Upstart credit grades and FICO scores found that loan seekers with FICO scores above 700 that had low grades from Upstart defaulted on 9.2% of loans. Meanwhile, Upstart's high-grade (low-risk) clients that had FICO scores below 639 only defaulted on 1.2% of loans. Basically, Upstart's graded scoring was far more accurate at determining which borrowers were likely to default.
The company's model is getting rave reviews, as its Net Promoter Score is greater than 83. The company has also seen massive growth, with revenue rising 156% year over year to $310 million. Upstart is also profitable, with a profit margin of 11%.
NASDAQ: UPST
Key Data Points
Upstart's stock took a hit recently over some news that is not as bad as the bears are saying it is. Upstart got its start by assessing creditworthiness on personal loans, and it packaged the loans it approved and sold them off to partner lending institutions, taking the loans off its balance sheet and reducing its risk. This year, it expanded into auto loans. To improve its credit assessment algorithms, Upstart took some of those loans onto its balance sheet short-term as part of its R&D, which upset some investors. The added debt is not large, its intended to be short-term and it opens up a much larger addressable market to tap into. These are all part of Upstart's long-term plans.
The loan origination market is massive, pegged at $6 trillion when you combine personal loans, auto, mortgages, and small businesses. Upstart will eventually expand to operate in all of these markets. In 2021, the market recognized this potential and got way too enthusiastic about Upstart, pushing the stock price to nearly $400 and the valuation to more than 40 times sales.
These days, the stock trades for less than four times sales, around $40. The opportunity is still there; investors can now access it at a more reasonable price now.
A bear market opportunity
In five years, these three companies will be larger and more dominant than they are today. Investors should use today's fear and market weakness as entry points into fantastic companies that can generate fantastic returns if given the time.
