The market events of the past year have discounted stocks across a variety of industries. Growth-oriented businesses have been hit the hardest in many cases, as less capital has flowed into the markets and investors have sought out more seemingly recession-resilient industries.
However, for investors with the capital on hand and the risk-resilience to ride out these market dynamics, growth stocks with explosive potential that are trading at a discount could present an undeniable buying opportunity in the current environment. Today, we're going to take a look at two such stocks that are trading down by approximately 75% to 92% over the trailing 12 months, but both of which could still enrich investors' portfolios many times over in the long term.
1. Upstart
Historically, the lending industry has cut many consumers out of the game, largely because of its heavy dependency on the traditional credit-based FICO score. Upstart (UPST -8.89%), a platform that uses artificial intelligence (AI) and machine learning to assess risk and determine approvals for people using additional factors like education and income, is seeking to change this dated system. In doing so, it hopes to capture a broader range of creditworthy consumers who have been denied access to loans in the past due to these stringent parameters.
Upstart partners with a network of credit unions and banks across the U.S., and most of its loans are funded by institutional investors. Given the current market environment, it follows that institutional investors are less inclined to part with their capital, and the higher risk of default across the broad consumer base also means that fewer loans are likely to be approved. Concerns about this environment have been a huge factor behind the stock's more than 90% decline in the trailing 12 months.
However, Upstart's model is constantly learning and recalibrating to the confines of the macro environment. So even as loan volumes are down and the loans that are approved are being assessed higher interest rates, this isn't a flaw in Upstart's model, but rather an indication that it is working exactly as it ought to. In the most recent earnings call, CEO and co-founder Dave Girouard noted:
While we dislike a weakened economy as much as you do, the increase in default rates that accompany this weakness serve to train our AI models faster. While other platforms continue to retreat to serving super-prime consumers, Upstart is rapidly learning how to price and serve mainstream Americans in all market conditions.
Although the most recent quarter saw a decline in revenue on a year-over-year basis, the company still reported total revenue of $157 million, while 75% of all loans processed through its platform were fully automated. Meanwhile, even as lenders are being more cautious in the current environment, Upstart is still rapidly scaling its partner network.
The company reported that 17 new lenders joined its platform in the third quarter of 2022, which is as many as it onboarded in the entire full year 2021. The company isn't rapidly burning through its cash, and Upstart posted a cash position of approximately $830 million as of the end of the most recent quarter.
There's no doubt that the imminent market environment will continue to present challenges for Upstart's business. However, the strength of its underlying model, which continues to gain broad adoption with lenders across the U.S., can continue to have an innovative, marked effect on the multi-trillion-dollar lending market. This could make Upstart an attractive investment for those looking to take a long-term buy-and-hold position in a stock with explosive growth potential. Currently, some Wall Street analysts think the stock could achieve a high 12-month potential upside of 82%.
2. Teladoc
Trading down by more than 75% over the trailing 12 months, shares of Teladoc (TDOC 0.70%) aren't the lowest they've ever been, but they're getting close. Teladoc's fall from investors' grace has been precipitated by several different factors.
For one, Teladoc has reported a deceleration in growth compared to pandemic levels. While this could have been expected given the surge in the platform's adoption by healthcare providers and patients during the pandemic, it seems to have made some investors shy away from the stock.
Meanwhile, Teladoc's acquisition of Livongo in 2020, which significantly strengthened its platform presence across the full breadth of chronic care solutions, came at the expense of what now appears to be an overly high purchase price. In the first two quarters of this year alone, Teladoc reported a whopping $10 billion in impairment charges related to the acquisition. These impairment charges heavily depressed Teladoc's bottom line, another factor that has led some investors to dump the stock.
While those impairment charges were painful to watch as an investor, the most recent quarter would appear to portend a light at the end of the tunnel.The first two quarters of the year were steeped in losses from those blistering writedowns, but the third quarter saw a massive drawback on that score, with Teladoc shrinking its net loss to $73 million.
In the quarter, Teladoc's revenue jumped 20% year over year, while its GAAP gross margin expanded to 68.3% compared to 67.1% in the year-ago period. Meanwhile, the company generated $63 million in cash flow from operations for the three-month period, closing the quarter with about $900 million in cash on its balance sheet.
The telehealth market is expected to hit a valuation of about $309 billion in the U.S. by the year 2030. The need for quality virtual care solutions isn't waning, and it didn't start with the pandemic.
In the years ahead, the need for effective and streamlined virtual healthcare solutions will only increase with an aging population, the ongoing shortage of healthcare workers, expanding adoption by consumers and medical providers, and enhanced access to coverage by insurers providing key catalysts for growth. This can also be the tide that lifts all boats for Teladoc and its shareholders. Currently, some analysts estimate that Teladoc's high upside potential for the upcoming 12-month period could hit in the ballpark of 91%.
