A bear market occurs when the price of an asset or index falls by 20% (or more) from its all-time high. In the stock market's case, this occurs every 3.6 years on average. In 2022, both the benchmark S&P 500 index and the technology-centric Nasdaq 100 index have crossed the bear-market threshold. The selling has been broad and relentless, especially for tech stocks, many of which have lost more than 50% of their value. But for long-term investors, that has created some interesting opportunities.
These three companies are currently worth between $900 million and $2 billion, but they each have the potential to amass valuations of $5 billion by 2030. That opens the door to a significant amount of upside for investors. Here's why.
1.Upstart: implied upside of 144%
Upstart Holdings (UPST 3.44%) is an artificial intelligence company that is changing the way banks assess potential borrowers. It says its algorithm can deliver loan decisions faster and more accurately than traditional methods of assessment, which have historically relied on Fair Isaac's FICO credit scoring system.
Upstart has originated $25 billion worth of loans for its 60 bank and credit union partners since it started out, and it earns fees for doing so. But the company just entered the automotive loan segment, which is worth about $751 billion in originations annually, so it has only tapped a small slice of its potential so far. What's more, Upstart could be eyeing business loans and mortgages in the future, which would take its opportunity to $6 trillion each year.
Upstart is showing exceptional growth, increasing its revenue by a whopping compound annual rate of 96% between 2017 and 2021. But it's set for a slowdown after cutting its 2022 revenue guidance amid challenges like rising interest rates and a weakening economy, though neither of these issues are likely to last for the long term.
Upstart stock has taken investors on a rollercoaster ride. After listing publicly in December 2020 at $20 per share, it rose by over 20 times to an all-time high of $401 before crashing back to Earth, now trading at $24 per share. It has a $2 billion market valuation at the moment, so its stock price would need to rise by 144% to $59 in order to reach a $5 billion valuation by 2030.
That's only a fraction of Upstart's all-time high, and considering the company's potential, that goal seems very achievable by 2030.
2. Lemonade: implied upside of 323%
Lemonade (LMND -0.60%) is another financial technology company using artificial intelligence to transform an age-old industry -- this time, insurance. The company has developed a web-based bot that can interact with customers to write a quote in under 90 seconds, and pay claims within three minutes -- all without human input in most circumstances.
In the two years between the first quarter of 2020 and the recent first quarter of 2022, Lemonade has more than doubled its customer base to 1.5 million, and more than tripled its in-force premium from $133 million to $419 million. It comes on the back of the company's entrance into the car insurance market, its newest and potentially most lucrative segment. It could be worth over $316 billion in the U.S. during 2022 alone, from a pool of 198 million policyholders.
Yet despite Lemonade's strong growth, its stock has collapsed by 88% from its all-time high, and its market valuation now sits at a modest $1.1 billion. The company is losing quite a bit of money as it builds scale and expands its business, and investors have expressed little patience for this process amid the broader tech sell-off. But as the economy improves, so should the appetite for high-growth stocks.
Lemonade had a market valuation of about $10 billion at its all-time high stock price, so it would have to regain half of that level to reach $5 billion. It has the potential and the growth rate to achieve that by 2030, and if it does, it would deliver investors a return of 323%.
3. Redfin: implied upside of 455%
In an economic environment where interest rates are rising, real estate prices will typically fall, so buying Redfin (RDFN 0.57%) stock is a contrarian play. But the company might be the future of the industry, and it's too cheap to ignore right now.
Redfin has built an army of 2,750 real estate brokers across the U.S., and it represents 1.18% of all home sales by value. That significant scale allows the company to charge listing fees as low as 1%, far cheaper than the industry-standard 2.5%. Since Redfin started, it has saved sellers over $1 billion.
The company also operates an iBuying segment that purchases homes directly from willing sellers, then attempts to flip them for a profit. It's a risky practice especially if real estate prices are falling, and it dealt a catastrophic blow to Redfin's key competitor Zillow Group (Z -0.88%) (ZG -0.78%) last year. Thankfully, Redfin's iBuying business is much smaller, and it appears to have behaved less aggressively when acquiring properties, so there are no signs it will suffer a similar fate at this stage.
Redfin's stock once traded at $96.59, but it has fallen 91% from that level to $8.43 today. That places its current valuation at just $900 million -- less than half of its 2021 full-year revenue of $1.9 billion. In 2022, analysts expect revenue will grow further, to $2.5 billion.
Redfin stock would need to rise 455% to $47 in order to amass a $5 billion valuation, and there's a case that it might be there right now if not for the uncertainty in the real estate market. But that won't last forever. As long as Redfin continues to grow steadily over the next eight years, it should find the target very achievable.