2 Stocks Down More Than 90% That Investors Should Buy

This bear market has devastated much of the tech sector. Cathie Wood's Ark Innovation ETF, known for its investments in tech growth stocks, is down by about 70% from its all-time high, and many tech names the market once flocked to have lost more than 90% of their value.

Still, investors should remember that those sharp declines aren't always the end of the story. Consider, for example, that after losing more than 90% of its value in the dot-com bust, a promising tech company called Amazon staged a healthy comeback.

Admittedly, stocks that have fallen that far carry some risk, so they aren't suited for more conservative investors. But given their growth potential and signs of resiliency, Upstart (UPST -1.25%) and StoneCo (STNE -1.64%) are two stocks that could bounce back despite having fallen so much from their peaks.

Upstart

Upstart utilizes artificial intelligence and machine learning to analyze prospective borrowers for default risk. Reviews of its model indicate that lenders that use Upstart's system can approve more loans without increasing their overall risks compared to those that use the industry-standard gauge of credit risk -- Fair Isaac Corp.'s FICO score. Initially, Upstart evaluated only people applying for personal loans, but the company has since ventured into auto loans and, more recently, small business loans.

Its stock price flew high in 2021, briefly topping $400 per share as its loan evaluation model began to gain traction. While this expansion fueled rapid growth, the stock reversed course amid higher interest rates and lower loan volumes. It now trades at about 95% below its all-time high. 

Moreover, Upstart is seen as carrying a good deal of risk by depending on just two banks for most of its business. Also, it upset investors by keeping loans on its balance sheet, a strategy that runs counter to its reputation as merely a loan evaluation tool.

But despite its challenges, Upstart's revenue for the first six months of 2022 came in at $538 million, up 71% compared to the same period in 2021. While that may sound impressive, that was a slowdown relative to its 264% revenue growth in 2021.

Additionally, net income for the first half of 2022 fell to just under $3 million from $47 million in the first half of 2021. A 104% increase in operating expenses led to the earnings decline.

But due to the drop in the stock price, its price-to-sales ratio has fallen to around 2, down from 48 less than one year ago. That dramatically lower valuation multiple could reduce the risk for investors who add this promising but beleaguered company to their portfolios now. If Upstart can continue to lure lenders away from FICO, this fintech stock could deliver big returns.

StoneCo

Warren Buffett's team added  StoneCo to the Berkshire Hathaway portfolio even before the Brazilian fintech's initial public offering. StoneCo operates an ecosystem similar to Block's Square, but in Latin America, providing various fintech services and enterprise software solutions to businesses in Brazil.

The stock shot higher immediately after its 2018 IPO, briefly going above $95 per share. However, since that time, StoneCo has faced increasing challenges. For one, its clients suffered amid the COVID-19 pandemic. Moreover, Brazil's government imposed a new regulatory framework that required StoneCo to increase its reserves, putting further pressure on the stock.

The challenges continue. Brazil's inflation rate climbed into double-digit percentages in recent months. While that does not compare to the near 80% inflation in neighboring Argentina, it is a significant uptick compared to the previous decade. Also, Brazil will hold a presidential election on Oct. 2, a factor that adds to the uncertainty.

But for all of its challenges, the company's revenue growth remains robust. In the first half of 2022, it reported revenue of 4.4 billion reals ($818 million), a 195% year-over-year increase. 

Admittedly, its bottom-line loss of 802 million reals ($150 million) in the first two quarters of 2022 does not compare favorably to the 684 million reals in profit it booked during the same period in 2021. The difference came from the mark-to-market values of its equity investments. This caused an 850 million reals reduction in earnings in the first half of 2022 compared with a gain of 841 million reals in the first two quarters of 2021.

Still, investors should take note of the stock's much lower valuation multiple. StoneCo's price-to-sales ratio has fallen to around 2, down from 44 in February 2021. Given that much lower valuation, rapid revenue growth could arguably make StoneCo stock a buy despite the risks.