2 Growth Stocks Down 80% and 93% That Billionaires Are Buying on the Dip

Growth stocks have sold off sharply this year in response to high inflation and rising interest rates, but those macroeconomic forces have been particularly devastating in certain industries. For instance, fintech lender Upstart Holdings (UPST -1.51%) and e-commerce software vendor Shopify (SHOP -1.90%) have seen their share prices plunge 93% and 80%, respectively. But some billionaires were still buying the stocks in the second quarter.

For instance, Jim Simons of Renaissance Technologies added to his stake in Upstart and started a position in Shopify. Meanwhile, Ray Dalio of Bridgewater Associates doubled-down on Upstart, and David Siegel of Two Sigma Advisers increased his position in Shopify.

Is time to buy these growth stocks?

Upstart is on a mission to disrupt the lending industry

Upstart looked unstoppable last year. It grew revenue 264% to $849 million in 2021, and it generated a GAAP profit of $135 million. But the story is much different this year. High inflation has made lenders more hesitant to extend credit, and rising interest rates have deterred some borrowers from taking on debt. That led to downright disappointing financial results in the second quarter. Upstart saw revenue rise just 18% to $228 million, and the company posted a GAAP loss of $30 million.

Those results notwithstanding, Upstart nearly tripled the number of banks and credit unions on its platform, and those lenders have seen returns on Upstart-powered loans that consistently meet or exceed expectations. Investors still have reason to be bullish on Upstart, as its disruptive approach to lending appears to be taking root.

Traditionally, lenders have made credit decisions with a relatively limited amount information. Even the more sophisticated credit models often incorporate no more than 30 variables, and that lack of data leads to poor decisions. Some creditworthy applicants are denied, and others pay too much interest to subsidize the borrowers who inevitably default (i.e. the ones that never should have been approved).

To resolve those inefficiencies, Upstart takes an entirely different approach. Its platform captures over 1,500 data points per applicant, and it uses machine learning (a type of artificial intelligence that improves over time) to measure those data points against past repayment events. That theoretically allows Upstart to quantify risk more precisely, leading to lower loss rates for lenders. At this point, data provided by the company does indeed suggest that its machine learning models predict risk more precisely than traditional credit models.

As a caveat, Upstart's software has not been tested during an economic downturn, meaning the current environment -- rampant inflation and rising interest rates -- is uncharted territory. And the large deceleration in revenue implies that some lenders are worried. Upstart's future success depends on its ability to dispel those concerns by quantifying risk more precisely than traditional credit models throughout the current downturn.

That being said, Upstart's machine learning models do appear to be a competitive edge (at least during a favorable economic environment), and the company pegs its addressable market at $1.5 trillion in transaction volume, leaving a lot of room for growth. With shares trading at a relatively inexpensive 2.5 time sales, I think it's worth building a small position in this growth stock right now.

Shopify is working to simplify commerce

Shopify has struggled alongside the broader retail industry this year. High inflation has forced consumers to prioritize necessities like food and fuel over discretionary purchases, and the impact of that trend has been magnified by the deceleration in online shopping in the wake of the pandemic.

Not surprisingly, Shopify delivered a disappointing financial performance in the second quarter. Revenue rose just 16% to $1.3 billion, and the company generated an operating loss of $190 million. That being said, Shopify is still the leading e-commerce software platform as measured by market presence and user satisfaction, and it continued to gain market share in both online and offline retail sales in the U.S. in the second quarter. Moreover, investors have good reason to believe Shopify will continue to capitalize on the growing adoption of e-commerce worldwide, a market expected to hit $5.5 trillion  this year.

Shopify is already the retail operating system for over 2 million businesses. Its software simplifies omnichannel commerce by allowing merchants to manage sales across physical and digital channels from a single location. That includes popular online marketplaces like Amazon and Etsy, and social media networks like Meta Platforms' Facebook and Instagram. But it also includes direct-to-consumer (DTC) websites. That distinguishing trait is particularly important because DTC business models afford merchants more control over the buyer experience, making it possible to build lasting customer relationships.

Shopify also provides value-added solutions like payment processing, money management accounts, and cross-border commerce tools. Merchants can also access thousands of third-party integrations through the Shopify App Store, including tools for payroll, marketing, and enterprise resource planning.

Better yet, Shopify recently completed its $2.1 billion (cash and stock) acquisition of logistics service provider Deliverr, a move that will accelerate the build-out of the Shopify Fulfillment Network (SFN). That could ultimately help Shopify compete more directly with Amazon, as the SFN will enable Shopify merchants to offer next-day and two-day delivery to buyers across the U.S. Management expects the project to reach scale in late 2023 or early 2024.

Currently, Shopify stock trades at 8.7 times sales -- a real bargain compared to the five-year average of 30.1 times sales. And given its strong presence in a large and growing market, I think it's worth buying this growth stock on the dip.