The bear market of the past year has kept investors on their toes. While stocks across a variety of sectors feel the pain, few have been hit as hard as those on the growth-centric Nasdaq Composite index. Many of these growth stocks have seen some improvement in 2023. Still, there's no telling whether the bear is finally giving way to a bull market, or if further discounting will take hold. The index itself is still down by double-digit percentages from its all-time high.
Turbulent market or not, if you have $1,000 that isn't needed to pay monthly bills, bolster an emergency fund, or pay off credit card debt, there are plenty of superior companies begging to be invested in. Here are two to consider.
1. Upstart
Upstart (UPST 3.90%), is an artificial intelligence-based lending platform that partners with financial institutions to provide consumer loans using non-traditional creditworthiness assessment. The company isn't getting the praise from investors that it did in prior years, largely because the overall lending environment is constrained, with loan volume broadly depressed in the current economy. It's also being dinged for keeping a higher-than-usual number of loans on its balance sheet. Investors are shying away from the stock over short-term losses, which could be shortsighted.
Granted, Upstart still has work to do to right itself in the current economic environment, making the stock a somewhat risky investment at the moment. But it's vital to understand how Upstart got here and that the underlying business still has great potential.
Upstart uses artificial intelligence (AI) to provide a growing range of loan types (including personal and auto loans) by using nontraditional data points aside from Fair Isaac's FICO scores to assess an applicant's creditworthiness. Its platform expands access to credit for consumers, including those rejected based only on their FICO score, while also lowering the risk of default and losses for partner institutions.
Upstart is still in the relatively early stages of growth (the company is just over a decade old), but its model has proven resilient over time. Until recently, the lion's share of loans facilitated through the platform got purchased by its network of institutional partners. This lessened the risk to Upstart's balance sheet and allowed it to continue fueling rapid growth. The troubled economy changed the lending landscape, and the changes are beyond Upstart's immediate control.
With interest rates so high, consumers are less likely to apply for loans, and institutional investors are more reluctant to fund them. The loans that are approved generally carry higher interest rates. These factors raised expenses and elevated the default risk generally, worrying Upstart's partners. This led to Upstart keeping more loans on its own balance sheet. It had about $1 billion in loans on the balance sheet at the end of 2022 (compared to $704 million in the third quarter).
Upstart's AI platform is constantly adjusting to the risk variance in the current economy, which means it's approving fewer loans and further depressing loan volume. That's why loan volume and revenue are down, and the company is now unprofitable.
So, what's Upstart doing about it? Management indicated in the latest earnings call that it is working on the loan-buying synergy between Upstart and its institutional partners. It aims to make that relationship less subject to such immediate economic shifts that hit the company's financials. One way the company tries to do this is by marketing its Upstart Macro Index to others. The service aims to provide real-time data allowing lenders to make more accurate decisions about lending rather than using quickly outdated information.
Upstart is also playing the waiting game. As the economy improves, Upstart's lending volume should recover, and its institutional partners should be more amenable to buying its loans again.
While it waits, it continues to expand its network. The company ended the year with 778 dealers in its auto loan network, and 92 credit union and bank partners. These figures represented increases of 90% and 120%, respectively, from the year-ago period.
Lenders might be scaling back originations right now, but Upstart continues to aggressively build out its partner network, a sign that it remains confident in its platform's technology. For long-term investors with a minimum buy-and-hold horizon of three to five years, this -- coupled with the company's continued potential as a disruptor in the multitrillion-dollar lending market -- could warrant even a modest position in this growth stock.
2. DexCom
DexCom (DXCM 1.89%), a leader in the diabetes care market, is far less volatile than Upstart. The company develops and sells continuous glucose monitoring (CGM) devices, which track blood sugar levels. These devices can be extremely beneficial for type 1 and type 2 diabetics, and potentially even those with pre-diabetes. But adoption remains relatively low.
For DexCom, with a market share of around 40% globally at the time of this writing, this creates a notable growth opportunity while it continues to generate recurring revenue from its existing users. CGM products aren't a one-and-done purchase. Its products have sensors and transmitters that require regular replacement. As such, DexCom's revenue and earnings revolve around a subscription-based business in which users are regularly sent a new supply of products. The G7, DexCom's most recent version of its flagship CGM product, has a wear time of 10 days, for example.
The full-year 2022 saw DexCom grow its revenue to $3 billion, a 19% increase from 2021. This figure was driven by 16% revenue growth in the U.S., while international revenue jumped 28% in 2022. Some reductions in R&D expenses and more efficient operations helped boost the non-GAAP bottom line nearly 60% to $341 million for the year.
Also key to CGM adoption is the expansion of insurance coverage, which DexCom is aggressively working on. For example, in the 2022 earnings call, CEO Kevin Sayer said that an anticipated Medicare ruling and broader commercial coverage, "which we expect to follow shortly ... has the potential to nearly double our addressable reimbursed market in the United States."
By the end of 2022, DexCom had grown its user base to 1.7 million, adding 450,000 people in the year. It's estimated that there are as many as 37 million diagnosed diabetics in the U.S. alone and roughly 15 times that number globally. And it's forecast that there will be more than 780 million diabetics globally by 2045.
So there is a broad and growing opportunity for DexCom, domestically and internationally. For investors, now could be a compelling opportunity to invest in a fast-growing healthcare business with a long runway for growth, profitability, and a steady share in a competitive market. And that's whether or not another full-fledged bear market appears.
