The past few years have been tough on speculative growth stocks like Upstart (UPST 2.19%) and SentinelOne (S 6.16%). High interest rates have soured investors' appetite for both stocks and, in Upstart's case, turned the business itself on its head.
But the tide could soon turn: There is growing anticipation of rate cuts this fall, a potential catalyst for stocks like these.
Both companies use artificial intelligence (AI) in their products, and they threaten to disrupt industry incumbents, offering investors intriguing long-term potential.
To be clear, both stocks are highly speculative. Nonetheless, now could be the perfect time to consider them as high-risk, high-reward additions to a long-term portfolio. Here is what you need to know.
The pitch for Upstart
NASDAQ: UPST
Key Data Points
Upstart was a market darling in 2020 and 2021, when low interest rates and high demand in consumer lending fueled excellent results. However, high rates extinguished that demand and turned profits into steep losses, which the company has grappled with for the past two years.
Upstart uses proprietary AI to evaluate loan applicants. It claims its technology is better than a credit score, which means better credit access for consumers and more approvals with fewer defaults for lenders.
The company has had some good achievements these past couple of years. Since going public with just 10 banks and credit unions in 2020, it has expanded its network of lender partners to over 100. It has also expanded from personal loans into auto loans and home equity lines of credit (HELOC).
Most importantly, it has worked to develop relationships with capital partners to create committed funding for its approved loans. Upstart's business virtually froze in 2022 because risk-averse investors stopped buying its loans.
It has a long road ahead, and management says that the lending environment remains challenging. However, the worst could be over. Revenue appears to have bottomed out and started growing again, and spending cuts enabled the company to stabilize its losses.
UPST revenue (TTM) data by YCharts; TTM = trailing 12 months.
A friendlier business climate will allow Upstart to get back on track and show Wall Street what it can do. The stock is still down over 93% from its former high, and it's unclear if it will ever fully recover. But buying shares now -- near peak pessimism, just as the narrative shifts on a company headed back in the right direction -- could prove lucrative.
The pitch for SentinelOne
High interest rates didn't turn cybersecurity standout SentinelOne upside down, but they did cool what was formerly one of Wall Street's hottest valuations. The company went public in the summer of 2021, the height of growth stock euphoria. Shares once traded at a price-to-sales (P/S) ratio as high as 106, a blistering valuation that's virtually impossible to justify.
Sure enough, interest rates surged, and investors ran away. The stock's P/S has fallen as low as 7.5 since then.
NYSE: S
Key Data Points
A stock falling 70% from its high probably doesn't inspire confidence, but SentinelOne has continued firing on all cylinders. Its AI-powered cybersecurity is proactive, hunting for threats instead of waiting to respond to an attack.
High demand for cutting-edge security has fueled stellar growth. Revenue has multiplied to over $674 million, and profit margins have improved so much that free cash flow turned positive to $33 million last quarter.
S revenue (TTM) data by YCharts.
SentinelOne routinely performs well in third-party tests, underlining the quality of its technology. And the company has fantastic prospects.
Cybersecurity is a competitive industry, but the opportunity is enormous. Fortune Business Insights projects that the global market could grow from $193 billion in 2024 to over $500 billion by 2032. Revenue grew by 40% year over year last quarter, and double-digit growth could last years if its cutting-edge product gobbles up market share in an industry that's already growing.
The stock trades at a forward P/S under nine today, less than similar stocks like CrowdStrike, Zscaler, and Palo Alto Networks. There's a good chance that SentinelOne will earn a higher valuation as it turns profitable, which seems inevitable after such an impressive margin improvement last quarter. The company's high-tech product, vigorous growth, and cheap valuation could combine for market-beating returns over the coming years.
