The market has discouraged many investors over the past year, and you're not alone if you're viewing your portfolio performance with disappointment as the end of 2022 draws near. Investors will inevitably encounter down periods in the market throughout the course of their investing journey.
These periods can be a blip on the radar or last for months or more as this recent volatile market has. However, if you're investing in a wide variety of companies that you intend to hold long term, the events of the past year or even the next one shouldn't keep you on the sidelines.
On that note, let's take a look at two top growth stocks with oodles of potential that are trading down at the moment but could go parabolic in the years ahead.
1. Upstart
Upstart's (UPST -1.21%) lackluster financial reports in recent quarters have left some investors feeling uneasy about the fintech stock's future. This has been evidenced by the stock's precipitous decline of roughly 90% since the beginning of 2022. The driving force behind Upstart is its proprietary AI and machine learning-powered platform, which determines the creditworthiness of someone applying for a personal loan around factors that most traditional lenders leave out of the picture. So, rather than relying primarily on the FICO score to assess whether or not to approve a loan, Upstart considers other factors such as the individual's income, education, and job history.
Now, as interest rates continue to rise, fears of a recession loom, and consumer wallets are constrained, it should come as no surprise that Upstart's lending partners -- the institutional investors and banks that fund the loans -- are more hesitant to part with their capital than in times past. Plus, the loans these partners do fund are going to come with higher interest rates assessed, which puts off more than a fair share of consumers who are already cost-conscious in the current environment.
Meanwhile, due to the factors internal to Upstart's algorithm, its platform calibrates in accordance to changing risk dynamics. What does all this boil down to? Fewer applications from cash-strapped consumers, fewer loans being purchased by banks and institutional investors, and fewer loans being approved by Upstart's platform.
And the ones that are approved come with much higher interest rates than before. So, while Upstart's proprietary platform is working exactly as it should in the current environment, the reality of the current economic cycle means that loan originations (and therefore revenue and profits) will inevitably suffer in the near term.
Still, Upstart is seeing positive progress in a number of key areas. Small business loans, a more recent addition to Upstart's platform, jumped from $1 million in loans originated in the second quarter to $10 million by the end of the third. And 75% of loans were fully automated in the most recent quarter. Even in the current environment, it launched partnerships with 17 new bank and credit lenders in the third quarter alone -- as many as it did in full year 2021.
Finally, Upstart's auto-lending segment is growing so quickly that its software is now deployed across more than 700 dealers nationwide, capturing 25% of the entire U.S. auto market.
It's not an easy time to be an Upstart investor, and more bumps in the road may lie ahead. All that being said, the strength of Upstart's model and innovative platform, which is still seeing positive growth in core business areas in the current market, can bode well for a robust recovery after the storm has passed.
2. Pinterest
Pinterest (PINS -0.64%) is another pandemic-era favorite that has fallen out of favor with many investors in recent months. There have been a couple primary reasons behind the stock's 30% decline since the start of 2022. For one, investors haven't liked the fact Pinterest's monthly active users have declined, even as average revenue per user has continued to grow.
Pinterest makes most of its money from ads, which everyone from small businesses to large brands buy to target the wide range of consumers who use the visual search platform on a regular basis. And in an environment where high interest rates, inflation, and concerns about a recession have caused companies to pull back on ad spend, this can impact any company with strong exposure to this space. Pinterest is no exception.
All of these concerns are valid and should be taken into account by prospective investors. However, a closer look is warranted. Yes, monthly active user growth has slowed, but that was following a period of dynamic, above-average growth during the pandemic, which was preceded by many years of successive but more moderate user gains. That figure also seems to be turning around.
In the most recent quarter, Pinterest reported a little positive movement in its monthly active user count on a year-over-year basis, closing the period with 445 million monthly active users compared to 444 million in the year-ago period. It's also worth noting that over the past three years, Pinterest has grown its trailing-12-month revenue by more than 140%. And the most recent quarter saw its total revenue and average revenue per user jump by rates of 8% and 11%, respectively, from the year-ago stretch.
Regarding ad spend, yes, the near term could cause companies to continue pulling back on spending initiatives. Taking a much broader view, though, robust digital ad campaigns remain non-negotiable for any company to survive in the modern age, and Pinterest can benefit from these durable, long-term tailwinds. Given the popularity of Pinterest's platform and the fact it presents prime internet real estate for ad placement, there's no reason to think the company can't continue to grow from here.
As of the most recent quarter, it was also sitting on a stockpile of $2.7 billion in cash and marketable securities. As the economy recovers, promoting a wave of new consumer and business spending, Pinterest's core business model can follow that trajectory to future success, as can its stock price.
