Legendary investor Peter Lynch once said, "I think the secret is if you have a lot of stocks, some will do mediocre, some will do OK, and if one or two of 'em go up big time, you'll produce a fabulous result." Put another way, a few big winners can more than offset any losses, creating life-changing wealth over time.
With that in mind, investors should consider adding Upstart Holdings (UPST 3.39%) and Riskified (RSKD 3.85%) to their portfolios. These companies are chasing large addressable markets, and both stocks could soar 1,000% (or 11-fold) over the next decade under the right circumstances.
Upstart: AI-powered lending
Banks rely heavily on FICO scores when making lending decisions, but those three-digit credit scores are based on a relatively limited number of variables. That creates problems. Some applicants are wrongfully rejected, while others are charged too much interest to cover the losses from borrowers that never should have been approved.
Upstart wants to make the system more efficient. Its lending platform uses artificial intelligence (AI) to measure more than 1,500 data points per borrower -- about 100-fold more than traditional credit models -- to help lenders quantify risk more precisely. According to management, Upstart's AI models separate high-risk borrowers from low-risk borrowers with five times more precision than FICO-based models.
Unfortunately, the current economic environment has been a serious obstacle for the company. Banks are less willing to extend credit to consumers battling high inflation, and consumers are less interested in taking on debt with interest rates on the rise. To that end, Upstart saw revenue plunge 31% to $157 million in the third quarter -- a dramatic turnaround from 250% revenue growth last year -- and the company reported a GAAP loss of $0.69 per diluted share, down from a profit of $0.30 per diluted share.
Worse yet, Upstart is a young fintech company and its AI platform has yet to be tested through a down period in the credit cycle. That creates an additional headwind. Lenders are even less likely to abandon familiar FICO-based credit models for a new technology amid the current environment. That has Wall Street feeling particularly bearish on Upstart at the present time.
However, that also creates an opportunity for long-term investors. Based on lending data from the past four years, Upstart can quantify risk far more effectively than FICO-based models, meaning its AI platform can lower loss rates for lenders. If that superiority persists through the current downturn, Upstart will likely see adoption soar as the economy rebounds.
With that in mind, Upstart currently powers personal loans, auto loans, and small business loans, which puts its total addressable market in the neighborhood of $1.5 trillion, but that figure is poised to grow as the company continues to expand into new lending verticals.
So, why could this growth stock produce monster returns? Upstart appears to have a competitive edge in a multi-trillion-dollar industry, and if revenue growth reaccelerates as inflation normalizes and interest rates fall, it's not hard to imagine its market cap -- currently $1.5 billion -- growing 11-fold (or 1,000%) to $16.5 billion over the next decade.
Riskified: AI-powered risk management
Riskified operates an AI-powered risk management platform. Its software helps online businesses boost approval rates and prevent fraud at checkout, which translates into higher revenue and lower fraud-related operating expenses. In fact, the 10 largest Riskified merchants have reported an 8% uptick in sales and a 39% decrease in chargeback costs.
Of course, Riskified faces competition from other payment service providers like PayPal and Mastercard, but its platform integrates more deeply with its merchants' infrastructure. That gives Riskified a data advantage, which theoretically makes its AI engine better at correlating consumer behavior patterns with the risk of fraud.
The company reported encouraging financial results in the third quarter. Revenue increased 22% to $63 million and its GAAP loss narrowed to $0.15 per share, a significant improvement from its loss of $0.82 per share in the prior year. Additionally, management raised its full-year guidance, noting strong upsell momentum among larger enterprises (i.e., those with more than $3 billion in online sales per year).
Looking ahead, Riskified could see tremendous growth in the coming years as its AI platform addresses a serious problem: False declines will cost merchants $720 billion in 2022, and fraud will cost $25 billion by 2024. Yet, Riskified has hardly scratched the surface of its total addressable market (TAM). This year, the company will handle about $100 billion in gross merchandise volume, but global e-commerce sales will total $5.7 trillion. Put another way, Riskified has captured less than 2% of a large and growing TAM.
So, why could this growth stock produce monster returns? If Riskified can modestly accelerate revenue growth over the next decade, it's entirely plausible that the company's market cap -- currently $814 million -- could grow 11-fold (or 1,000%) to roughly $9 billion.