Stocks may be up and down right now, but the current market environment won't last forever. Investors can look at this period in the market as one that presents an array of intriguing investment opportunities for great companies, even ones that are trading down temporarily.
No investment offers guaranteed returns, but for durable businesses with real tailwinds to promote future growth, these are the companies that can multiply returns for shareholders over a period of years.
Here are two top growth stocks with the potential to generate multi-bagger portfolio returns in the years ahead that investors may want to consider scooping up right now.
1. Upstart
Upstart (UPST 0.22%) operates an artificial intelligence-driven lending platform. Instead of relying almost entirely on an applicant's FICO score to determine their creditworthiness, Upstart uses its proprietary model along with elements such as income and education to make these assessments. Upstart has facilitated more than $30 billion in loans since its inception, and now offers a range of products, including personal loans and auto loans.
Upstart may have to contend with a challenging environment for the next several quarters. The company recently made cost-cutting moves with layoffs, which will eliminate about 20% of its workforce, but can also help the business remain more capital-efficient in the near term. Over the long term, the driving force behind Upstart -- its proprietary platform powered by artificial intelligence and machine learning algorithms -- is a competitive edge that can help it rebound rapidly when economic conditions improve.
Upstart's platform is constantly fine-tuning to the conditions at hand. The company recently launched a tool called the Upstart Macro Index, which it says "measures the impact of the external macro environment on loan defaults in our particular borrower portfolio, by controlling for underwriting model changes and shifting borrower characteristics over time." As of the third quarter, management said that the predictive model was rating the landscape with a 1.7, which "equates to 70% more defaults than we would expect in a long-run normal macro environment."
Upstart's loans are funded by its network of bank and credit union partners, and by institutional investors. So, right now, while risk of default is higher and consumer creditworthiness is largely in flux, Upstart is approving fewer loans. The loans it is approving are being assessed much higher rates of interest. And, understandably, many of Upstart's lending partners are less inclined to fund loans than they would be in less tenuous economic times. All these factors have contributed to the precipitous decline in loan volume that Upstart has witnessed recently.
However, the fact that Upstart's loan volume has declined and it's assessing higher interest rates means its model is working correctly, and factoring in the default risk present at this given point in time. As the economic situation rights itself, the reverse should happen. In the meantime, Upstart has a healthy stockpile of cash to help it weather the storm, and it's still rapidly expanding its network of lending partners. For example, its auto retail software is seeing such rapid adoption that it now captures one-quarter of the entire U.S. auto market. Bear in mind, the auto lending space alone represents a total addressable market of about $786 billion.
The continued growth of its lending network would also seem to indicate positive overall sentiment from its institutional partners, and the calibrative nature of its platform can help it to navigate and come out on the other side of the present storm. For risk-tolerant investors, this fintech stock's tremendous potential and its ability to continue disrupting the traditional lending system may represent a golden buying opportunity in this market and beyond.
2. Shopify
Shopify (SHOP 0.11%) has also had to contend with choppy sentiment from the markets, but it boasts a compelling underlying business that serves a durable and growing need. Its rapidly expanding platform gives business owners with virtually any level of experience or business idea the tools, software, hardware, and services they need to launch and grow a brand.
Shopify derives its revenue from a variety of sources, but a notable piece of the pie is the subscriptions it charges to business owners to use its platform and operate stores from it. These subscriptions are charged on a monthly or annual basis. They can start as low as $29 a month for a Basic membership, all the way up to $299 a month for an Advanced account in its three tiers of standard plans. The company also has a Shopify Plus subscription option, designed for enterprise customers, which starts at around $2,000 a month.
The other notable driver of Shopify's revenue is its merchant solutions business, which includes fees from payments processed on its platform and sales of its hardware offerings. In the first nine months of 2022, Shopify saw revenue jump 20% from the same period in 2021 to just shy of $4 billion. During this same nine-month period, subscription solutions revenue increased 10% year over year to $1 billion, while merchant solutions revenue surged by 24% to $2.8 billion.
These growth metrics, coupled with the fact that roughly 30% of all e-commerce sites globally are built using Shopify's platform and accompanying services, indicate that the company is continuing to draw users effectively. It also indicates that the company maintains a competitive edge in the somewhat fragmented e-commerce market. This also means there is an abundant runway for growth that the company has yet to tap into.
Online spending on the whole is on the rise. However, of the total retail sales reported worldwide in 2021, only about 19% took place in an online setting. This indicates that while the potential addressable market for e-commerce is massive and growing, huge swaths of the consumer populace remain vastly underpenetrated. Against this backdrop, Shopify is also making swift advances to draw and retain more merchants for its platform. The addition of Deliverr to the Shopify Fulfillment Network last summer is one example.
The more seamless the process for merchants to get their products to customers, the better for everyone involved, and the more likely it is that these business owners will continue to scale their brand from the Shopify platform. Management said the company was already seeing a 75% year-over-year increase in inventory processed through Deliverr cross docks in the third quarter.
All these elements portend well for Shopify's continued growth, even if consumer spending slows in the near term. This creates a notable opportunity for investors to jump on a high-potential business at a serious discount right now.
