The stock market gave investors their fair share of up and downs in early 2023, and no one can say for sure whether choppy or smooth waters may lie ahead in the months to come. Even so, truly wonderful companies with businesses on solid growth trajectories and the competitive advantages to drive future growth can help investors get through these periods and come out on the other side.
Investors who hold onto these types of companies through the years, amid both the worst and best days of the market, can yield market-beating returns over the long-term. Here are two such stocks to consider adding to your buy basket that could be potential multi-baggers over the next five to 10 years.
1. Upstart
Upstart (UPST 2.86%) is facing imminent challenges due to the difficult macro environment, but that doesn't mean these headwinds negate the underlying power of its platform or its long-term potential. The company's business model revolves around a very simple mission: to leverage the power of artificial intelligence to broaden consumer access to credit -- especially for those who have been left out of the lending markets in the past -- while appropriately and correctly managing risk, as well as streamlining the lending process for the institutional partners that fund these loans.
This mission has proven to be singularly effective over the years. In a 2022 study, Upstart found that its platform approved 173% more loans at the same default rate experienced by traditional lending institutions, while its proprietary algorithm enabled 53% fewer defaults at the same approval rate.
So what's the issue with Upstart right now? Well, fewer consumers are applying for loans given the high interest rates they would be contending with in the current moment, and Upstart's AI-powered platform is also approving fewer loans given the elevated risk of default for many consumers right now. Additionally, the current macro environment has caused many institutional partners to reduce or pause loan buying, which means that Upstart is carrying more loans than usual on its balance sheet. CEO Dave Girouard commented on this latter point in the 2022 earnings call, noting:
It definitely showed us some things we needed to know, kind of that an at-will model where funding can come and go or lending and/or investing in loans can come and go, you know, month to month is -- well, it might be sort of beautiful on a whiteboard, and from a pure economist point of view, it makes a lot of sense. But in reality, we need to have volume more locked in and secured, which is, you know, an important initiative for us.
Many of these factors are outside of the company's control. While the company is working on ways to better lock funding in, management has also been clear that the headwinds that Upstart is facing right now aren't at all tied to the underlying technology driving the business. It's also challenging to compel institutional partners to keep buying loans when the cost of doing so has skyrocketed in a high interest rate environment.
NASDAQ: UPST
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However, Upstart is in the process of launching a product that could give its lending partners the tools to make more time-accurate, risk-conscious decisions about consumer solvency based on real-time data. This product is the Upstart Macro Index, described as a tool that "measures how changing economic conditions like inflation and unemployment are impacting credit performance."
The launch of of this tool could give Upstart a competitive edge to continue to strengthen its institutional partnerships, and potentially reduce the incidence of such drastic shifts in funding procedures in the future. It's also worth noting that even as fewer loans are being bought off its balance sheet right now, Upstart is still rapidly expanding its network of lending partners. Its network of auto dealer partners surged 90% year over year in 2022, while the company closed out the year with 120% more bank and credit union partners than it had at the end of 2021.
The fact that Upstart is growing its network of lending partners even as its platform is approving fewer loans is a testament to the potential of its proprietary technology and that technology's ability to calibrate up-to-date risk factors as needed. Once economic conditions get better, its model is designed to adjust to changes in the risk of consumer default, which could result in a rebound of approvals. Even now, Upstart's platform is learning rapidly, and currently 82% of all loans processed through the platform are approved without a human getting involved. For investors seeking a promising business with disruptive potential over the next five to 10 years and beyond, Upstart could warrant a second look for the more risk-tolerant.
2. Etsy
Etsy (ETSY 3.51%) has built a compelling business that revolves around very niche segments of e-commerce. From vintage items to specialty goods to handmade treasures, Etsy remains a go-to platform for sellers around the world to market their wares to a global consumer base. Even as growth has slowed in recent quarters compared to the heightened results the company generated during the pandemic, this seemed to be an inevitable outcome.
For one, the level of growth that Etsy was experiencing earlier in the pandemic was unlikely to be sustainable in the long term. But that could be said of plenty of e-commerce businesses that saw heightened sales and profits in a time where most people couldn't leave their houses and could spend hours scrolling and shopping online.
As consumer wallets are constrained in the current macro environment, it would only be natural for a business like Etsy's to be affected to a certain extent. Even so, there are some distinct green flags for this business that long-term investors may be remiss to overlook.
NYSE: ETSY
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For one, Etsy is seeing increasing platform adoption from pre-pandemic levels, which is perhaps a more accurate measure of its overall growth story and trajectory. Case in point: In the third quarter of 2022 alone, Etsy's active buyer and repeat buyer counts were up 100% and 125%, respectively, compared to the same quarter in 2019.
Meanwhile, the company's habitual buyer segment -- individuals who spent $200 or more in the past year with at least six different days on which they made a purchase -- roared by a whopping 223% on a three-year basis. And Etsy's third-quarter gross merchandise sales were up 150% on a three-year basis. In short, this is anything but the story of a dying business.
Some investors were worried about the steep net loss Etsy recorded in the third quarter, although it's worth noting that this was related to a non-cash impairment charge to write down the value of acquisitions it made during the pandemic. Etsy operates in a multi-trillion-dollar addressable market, and has only penetrated about 3% of this space.
So not only is there room for more than one winner here even if competition heats up in the coming years, but the fact that Etsy remains one of the foremost presences in its specific niche of the e-commerce market with its focus on specialty and unique goods means that it's well-positioned to capitalize on the superior growth opportunity that this industry presents. For investors with the patience to hold onto Etsy through the near-term choppy waters of the market and the economy, the light at the end of the tunnel could be very bright indeed.
