One of the best characteristics of dollar-cost averaging into positions is that it removes the need to time a purchase flawlessly. For example, had I only made one large purchase of Upstart (UPST -1.21%), Coupang (CPNG -1.86%), or Etsy (ETSY 0.14%) late in 2021, I would need monstrous returns to break even.
However, by making small bets on these names throughout the last couple of years, I lowered my cost basis, building out properly sized positions to be held for the next decade and beyond. Continuing with this dollar-cost averaging, I've added to each of these three companies again this last week. Here is why I chose these three right now.
1. Upstart: Short-term struggles, long-term promise
Due to the macroeconomic volatility surrounding Upstart's AI-powered credit assessing operations, this is a smaller, speculative add for me in a company with massive potential. Facing rising interest rates and lower personal savings rates, Upstart saw credit defaults rise, putting immense pressure on its financials.
Data by YCharts.
This combination of rising rates and a financially stressed consumer base led to lower approval rates from Upstart's lending partners and higher APRs for its customers. Due to these headwinds, revenue declined 31% compared to last year's third quarter, while net income flipped back to a loss.
Data by YCharts.
Despite these drops, there are three key reasons I still like Upstart -- aside from the fact that its risk grades have outperformed FICO scores so far. First, Upstart grew its total banking and credit union partners from 31 to 83 over the last year while also growing its auto dealer rooftops to 702 from 291. Once the macroeconomic winds shift in the company's favor, it will be well-positioned to restart its expansion.
Second, Upstart holds $830 million in cash versus a net loan balance of $430 and has lowered its quarterly operating expenses from $227 million to $170 million in the last two quarters. Therefore, liquidity should not be an immediate concern for the company.
Last, with the benefit of time on its side, thanks to this liquidity, Upstart's AI has the opportunity to learn from a stressful operating environment it hadn't yet seen. It's a headwind now but a potential tailwind over the long haul.
Trading with a price-to-sales ratio of just 1.7 (compared to a figure in the teens in early 2022), the risk-reward ratio for buying Upstart is too interesting to pass up, considering its long-term promise.
2. Coupang: Improving network effects
When I first added shares of Coupang in 2021, a key part of my investment thesis was South Korea's high population density spurring efficiencies across the company's e-commerce and delivery operations. With 18 million active customers (over one-third of South Korea's population), Coupang's widespread adoption is showing significant progress in realizing these efficiencies.
Data by YCharts.
Since the company's initial public offering, it has delivered impressive 70% growth on the top line, but its outsized 113% gross profit increase points to even better margin improvement. Best yet, while Coupang grew sales by 10% year over year in Q3 (27% minus foreign exchange headwinds), its gross profit jumped by a staggering 64%.
These streamlining efficiencies highlight that the billions the company has invested in its fulfillment infrastructure (which now has the square footage of 500 football fields) is starting to scale beautifully. And these efficiencies have finally trickled down to a break-even point for net income and cash from operations alike.
Data by YCharts.
This newfound profitability comes despite continued investments in Rocket Fresh (grocery delivery), Coupang Eats (food delivery), Coupang Play (streaming for Coupang WOW members), and its fintech ambitions. With the company offering this budding growth optionality while increasing profits, I am happy to continue adding to and holding Coupang for the next decade.
3. Etsy: International ambitions at a discount
Thanks to its counter-positioning in e-commerce, selling personalized goods with a human touch, Etsy offers investors a unique moat in an otherwise commoditized industry. While its stock has been on a roller-coaster ride the last few years, being a perfect example of a pandemic darling, it now trades near a five-year low valuation.
Data by YCharts.
Despite its stock falling by 57% over the last year amid decelerating revenue growth, Etsy's operations are stronger than ever on a sales and cash-from-operations basis.
Data by YCharts.
While its 12% sales increase year over year in the third quarter is far from its doubling of sales between 2019 and 2020, Etsy's 88 million active users and 28% operating margins make it interesting at today's discounted price.
Furthermore, despite a $1 billion goodwill impairment from its Depop and Elo7 acquisitions marring its current profitability, Etsy's "house of brands" strategy is still in its nascency. While this write-down is disappointing, it seems to be an admission of overpaying for the companies in an expensive market, as opposed to the new units offering no potential for the long haul. Generating just 43% of its gross merchandise sales internationally, look for Brazilian-based Elo7 and British-headquartered Depop to lead Etsy's global ambitions.
With its advertising and buying expertise funded by healthy cash flows, I'm happy to let Etsy continue to innovate as it grows in new international markets over time.
