Over the past two years, Upstart Holdings (UPST 0.79%) has seen revenue soar 396%, which is equivalent to 123% growth on an annualized basis. During the same time, Zoom Video Communications (ZM 0.05%) saw sales skyrocket 409%, which is equivalent to 126% growth on an annualized basis.
In spite of those mind-boggling metrics, Upstart and Zoom have seen their share prices plunge 94% and 82%, respectively. Is this a buying opportunity?
1. Upstart Holdings
For decades, Fair Isaac's FICO score has been the gold standard in determining loan eligibility. But FICO scores only consider a few variables -- even the more sophisticated credit models often include no more than 30 data points -- which means lenders often make the wrong decision. Some creditworthy borrowers are rejected and some non-creditworthy borrowers are approved, both of which hurt profitability for lenders.
Upstart uses big data and artificial intelligence (AI) to make lending less risky. Its platform captures 1,500 data points per borrower, and its AI models measure those variables against past repayment events to quantify risk. That theoretically translates into lower loss rates. In fact, for loans originated between 2018 and 2021, Upstart's AI consistently bested FICO-based underwriting in predicting annualized defaults.
That value proposition has fueled incredible financial results. In the first quarter, revenue soared 156% to $310 million, and earnings skyrocketed 209% to $0.11 per diluted share.
So why is the stock down 94%? Management is forecasting sales growth of just 18% in the second quarter, and that weak guidance has Wall Street worried. High inflation will almost certainly lead to more defaults, so banks will likely be more cautious when originating loans. That's especially true for Upstart-powered loans, because its AI engine has never been tested during a down period in the credit cycle.
However, if Upstart continues to demonstrate its superiority over traditional models in the current inflationary environment, banks and credit unions could be throwing money at the company a few years from now. Of course, there is no guarantee that will happen, but so far Upstart has delivered on its mission to make the lending industry more efficient.
On that note, Upstart's total addressable market (TAM) currently sits at $860 billion, a figure that comprises both personal loans and auto loans. But the company has a small business lending product in the works, which will bring its TAM to $1.5 trillion. Given the size of that opportunity, it's not hard to imagine Upstart -- which currently has a market cap of $2 billion -- growing tenfold (or more) in the next decade.
That's why this supercharged growth stock is worth buying, though investors should keep the position small until Upstart proves that its AI models are effective in a difficult economic environment.
2. Zoom Video Communications
Zoom saw sensational growth at the onset of the pandemic, when its videoconferencing application Zoom Meetings rapidly became the gold standard in remote work. But many investors have since cast the company aside as growth has decelerated, chalking it up as a COVID stock that has run its course. That seems short sighted.
Zoom is disrupting the communications industry in a profound way. Its cloud platform unifies video, voice, chat, and contact center solutions, meaning customers can streamline operations by provisioning those services from a single vendor, without the complexity of managing the underlying infrastructure.
Better yet, as the market leader in videoconferencing software, Zoom has cultivated significant brand authority, enabling a land-and-expand growth strategy that is starting to gain momentum. Zoom Meetings currently accounts for the vast majority of revenue -- no other product yet represents 10% of sales -- but Zoom Phone recently hit 3 million seats, up from 1 million in early 2021. That strong adoption of an adjacent service bodes well for the future.
Financially, in spite of tough comparisons, Zoom posted respectable results in the first quarter. Revenue climbed 12% to $1.1 billion -- after growing 191% in the same quarter last year -- and free cash flow (FCF) rose 10% to $498 million. That works out to a monster FCF margin of 46%.
Going forward, investors should look for products like Zoom Phone and Zoom Contact Center to grow as a percentage of revenue. Zoom has already captured mind share with Zoom Meetings, and the company now has the opportunity to help customers consolidated all business communications on a single platform.
Additionally, Zoom is working to add value through adjacent AI services. For instance, Zoom IQ for Sales uses AI to analyze customer conversations in Zoom Meetings and to then surface insights that drive sales productivity. Innovations like that should keep Zoom in growth mode for years.
On that note, management puts its market opportunity at $91 billion by 2025, the vast majority of which can be attributed to Zoom Meetings, Zoom Phone, and Zoom Contact Center. And with shares trading at 7.5 times sales -- near an all-time-low -- now is a good time to buy this growth stock.
