Many stocks were knocked off their perch in 2021 when the market came to its senses. Among those companies that were taken down were Upstart (UPST 2.76%) and Twilio (TWLO 1.47%). At their peak, these stocks traded at absurd valuations but also had strong and growing businesses behind them. Once those businesses began to slow (or even shrink), investors tossed these stocks aside in favor of new ones.
But just because a stock gets tossed aside doesn't mean investors can't find value in them. With both stocks down around 85% from their all-time highs, they may never top that number. However, that doesn't mean they can't be solid investments. So should you buy Upstart and Twilio? Let's find out.
Upstart
Upstart's artificial intelligence (AI) powered lending software gives lenders an additional tool to assess creditworthiness. The traditional FICO score only looks at a few factors, while Upstart's model uses multiple checks to assess how likely an applicant is to default. Upstart says it's product is so powerful that it separates risk 5 times more than FICO scores and has 53% fewer defaults at the same approval rate.
That's a no-brainer for lenders, but the problem is fewer people are taking out loans.
With higher interest rates, fewer people are taking on an auto or personal loan, as they likely locked in an ultra-low rate during 2020 through 2022. However, these loans do expire, and once another one is needed, Upstart will be there to assess their worthiness.
That's my bull case on the stock, but the present is pretty grim. In the first quarter, revenue fell by 67% thanks to originated loans dropping 78% from last year. This caused Upstart's profitability to go away, disappointing investors.
Still, thanks to a few new client wins in the second quarter, the stock has done well in 2023, as it's up 260% so far this year. Still, it's trading at a low valuation.
UPST PS Ratio data by YCharts
At 6.2 times sales, the stock isn't trading at a true bargain level, but it isn't overvalued. At the same time, this price-to-sales ratio also assesses the company at its worst, so once sales improve, the valuation will drop again.
With that in mind, Upstart's stock still has plenty of room to run. However, you must commit to the stock for three to five years for this investment to make sense, as the turnover in the lending industry won't occur for a few more years.
Twilio
Twilo's products help its clients communicate with their customers better. Whether that is through text messages or a link that quickly sets up a video conference call, Twilio has a large toolkit for businesses of all sizes. It also has great customer acquisition tools and helped businesses like Domino's Pizza reduce customer acquisition costs by 65%.
However, Twilio bills its customers on a consumption basis, and now that many clients are focused on becoming more efficient, Twilio's products are some of the first to get curtailed. This has severely hurt the business, as its revenue only grew 15% in Q1 and is expected to slow to a 5% pace in Q2.
On the plus side, Twilio's profitability measures are starting to work, as the company posted $0.47 in non-GAAP (adjusted) earnings per share in Q1. Still, Twilio has a ways to go before reaching true profitability, as it has a hefty $160 million stock-based compensation bill (which isn't included as an expense in non-GAAP calculations). With that line item making up about 16% of revenue, it's a big one to ignore.
Still, at 3.3 times sales, Twilio's stock is valued at an extreme low.
TWLO PS Ratio data by YCharts
While the company still needs to show it can operate outside of a growth-at-all-costs environment, Wall Street analysts don't expect Twilio's low growth to continue. In 2024, they expect revenue to rise by 11% -- indicating a return to growth mode.
Investors are very short-sighted about Twilio's stock, as they have recently gotten burned. However, this business has long-term potential, and investors should consider devoting a small portion (say 1% to 2%) to Twilio, as the stock has a lot of room for upside.
