People are generally skeptical of change -- the unknown makes people uncomfortable. That's why many of the stocks that Wall Street loves today were often debated, ridiculed, and doubted in their early days.
It's likely that some of the stocks investors doubt today will eventually create enormous amounts of wealth for bold investors who took the chance and let the businesses behind them develop and blossom. Here are three disruptors that could eventually be huge winners.
1. Disrupting consumer lending
NASDAQ: UPST
Key Data Points
Upstart Holdings (UPST +10.04%) is a lending technology company using artificial intelligence to approve borrowers for consumer loans. Banks traditionally rely on credit scores, but Upstart claims its algorithms can produce 75% fewer defaults at the same approval rate. Upstart primarily deals in personal loans, but has recently gone into automotive loans and has its sights set on other flavors of credit, including small business loans and mortgages.
The company's goal is to originate loans, either directly or through its partner network of banks and credit unions, then offload those loans by selling them to investors. Upstart has 71 banks and credit unions as of the second quarter of 2022. The addressable market is worth $6 trillion if you include mortgages, and there are more than 11K banks and credit unions in the U.S. alone. Upstart has a tremendous runway of growth ahead if its algorithms continue working as advertised.
The stock's been a massive loser in 2022 despite its potential; rising interest rates and economic worries have not only hurt Upstart's origination volumes, but spooked institutions from buying some of the loans Upstart originated. The turbulence has led to the stock's 94% decline from its high, and it now trades at a price-to-sales (P/S) ratio of just two. Upstart must both navigate a downturn in the credit markets and prove its technology has staying power, but the potential rewards are huge if things work out.
2. Disrupting the real estate industry
NASDAQ: OPEN
Key Data Points
Opendoor Technologies (OPEN 2.51%) is turning the notoriously cumbersome process of buying a home into something resembling an e-commerce transaction. Anyone who has purchased or sold a house knows what it entails -- bidding wars, lots of steps and back and forth, fighting with sellers/buyers, and stress. Opendoor uses artificial intelligence-powered algorithms to generate cash offers for potential sellers. If accepted, the process streamlines through Opendoor, including legalities and closing. The process doesn't require an agent and the commission is 5% -- one point less than an agent typically charges.
Growth has been explosive since the company launched in 2014. Opendoor has done more than $15 billion in sales over the past year (the house's total price counts as revenue), on 14,135 homes in the second quarter of 2022. Residential real estate in the U.S. is worth approximately $43 trillion, which underlines just how small Opendoor still is in the grand scheme. Opendoor is the undisputed market leader in what it does (iBuying), so the company's upside is immense if consumers decide that iBuying is superior to traditional buying and selling.
Wall Street is still skeptical of Opendoor's business model, especially in a housing market that seems to be cooling off as mortgage rates keep rising. The stock has fallen to the mid-single digits, for a P/S ratio of just 0.2! Such a low valuation might imply Opendoor could go bankrupt, but Opendoor has nearly $2.5 billion in cash on its balance sheet to help it endure the volatility of the current housing market. Another speculative stock with significant potential, Opendoor, is a company worth keeping an eye on.
3. Disrupting human labor in the office
NYSE: PATH
Key Data Points
UiPath (PATH +2.17%) is using software to automate repetitive office tasks, freeing human employees to do more fulfilling jobs. Its product features software robots that monitor, learn, and replicate tasks. UiPath has integrations with almost every notable enterprise software application, so it can automate a wide range of functions inside a company.
The company has roughly 10,330 customers worldwide and generates $977 million in annual recurring revenue. UiPath competes with other technology companies that offer automation software, but its industry reputation is strong, considered the industry leader by renowned research firm Gartner. UiPath's product is good at infiltrating a company at a low level and picking up additional use cases as it proves itself. That fuels the company's strong 138% net revenue retention rate (NRR), which signals that customers spend more money on the product over time.
The company went public in April 2021, arguably at the height of the growth stock bull market. Understandably, shares have fallen sharply amid this volatile bear market, and are off approximately 81% from their peak. The stock now trades at a P/S ratio of nine, a far cry from its P/S of 60 when it IPO'ed.
UiPath is still growing and isn't profitable, but investors shouldn't panic about the company's short-term financials. UiPath has burned $110 million over the past year, but has $1.8 billion in cash against no debt. The stock could come back strong in a market recovery if it can maintain its industry leadership and show signs of turning a profit.
