Growth stocks have been on a roller-coaster ride in 2022 after enjoying massive gains from the March 2020 pandemic lows through the end of last year. That should come as no surprise given macroeconomic conditions have deteriorated in light of high inflation, increasing borrowing costs, and geopolitical concerns linked to the war in Ukraine. When economic conditions worsen, investors tend to exit positions in high-growth stocks in that many of them bear steep valuation multiples and lack a history of profitability.
Two companies, Shopify (SHOP 0.14%) and Upstart (UPST -0.58%), are particularly struggling right now. Not only are they being adversely impacted by macro conditions, but they're also both undergoing transitional phases at the moment. While the timing has been unfortunate, both companies still enjoy long runways for growth in the years to follow. On that note, which of the two stocks, if either, should investors consider buying today?
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Where does Shopify stand today?
Shares of e-commerce software titan Shopify collapsed 75% year to date. Other than the broader macroeconomic landscape, what is causing its stock price to fall so sharply? In its second quarter, the company's total revenue grew 15.7% year over year to $1.3 billion. As its top-line growth eased, the losses continued to pile up. In Q2, the e-commerce business endured a net loss of $1.2 billion, bringing its total loss in the first half of the year to $2.68 billion. For context, in the first half of last year, the company generated a positive bottom line of $2.29 billion.
So, what's with the massive change? If you take a look at Shopify's income statement, you'll quickly notice that its operating expenses skyrocketed in the second quarter. The company's total operating expenses rose 76% year over year to $845.9 million, equal to 65% of total revenue, versus 43% in the year prior. The e-commerce platform is aggressively investing in its Shopify Fulfillment Network, which is geared toward providing customers of Shopify merchants faster and more efficient shipping.
This is an extremely capital-intensive initiative, and while it will put pressure on Shopify's bottom line for some time, the company appears well positioned to weather the storm. It currently has $7 billion in cash and marketable securities, and a low debt-to-equity ratio of 14%. Thus, I'm confident that Shopify has what it takes to power through today's situation.
And what about Upstart?
In similar fashion to Shopify, artificial intelligence (AI) lending platform Upstart has witnessed its stock price plunge 83% since the start of the year. In Q2, its total revenue climbed 17.6% year over year to $228.2 million, while its net income finished in the red at negative $29.9 million. Reasonably so, many investors were concerned about how Upstart's AI lending model would respond to the darkening economic backdrop. Fortunately, supplementary data provided by the company during its second-quarter earnings call suggested that its model has maintained accuracy despite a shift in economic conditions.
While the company has seen an increase in defaults, which is consistent with industrywide trends, it has found that its lending model offers five times more accuracy than FICO with regard to distinguishing low-risk borrowers from high-risk ones. Thereby, it appears that its lending model is performing just fine in the down market -- a fantastic signal for long-term investors. Upstart is undergoing a transition of its own, however. Because economic conditions have worsened, the company has run into a problem where many of its credit partners have paused or reduced loan originations.
As a result, the company is temporarily leveraging its balance sheet in order to ensure consumers can receive the proper funding until it can devise a permanent plan that guarantees lending partners will continually invest through economic cycles. While I understand if investors are concerned, it's important to keep a long-term mindset in that Upstart's current transition is short term. Not to mention, it has $914.4 million in cash and restricted cash on its balance sheet, so it appears firmly positioned to handle the transition.
What stock should you buy?
There's no doubt about it -- both companies boast enormous total addressable markets. According to management, Upstart has a $6 trillion opportunity in the loan origination market. Statista estimates that online retail sales will grow by 50% over the next four years, up to $7.4 trillion -- good news for Shopify. Today, Shopify and Upstart carry price-to-sales multiples of 8.5 and 2.2, respectively. While both companies possess promising futures, I believe Upstart is the wiser investment today. Given its massive market opportunity, relatively discounted valuation, and superior growth to Shopify in recent quarters, it appears to be the better buy right now.
