Legendary investor Peter Lynch once said, “I think the secret is, if you have a lot of stocks, some will do mediocre, some will do well, and if one or two of them are going up strongly, you’ll produce fabulous earnings.” Anders Put simply, a few big winners can more than offset any losses and create life-changing wealth over time.
Against this background, investors should consider an increase Ordinary Holdings (UPST 1.31%) and risked (RSKD -1.82%) to their portfolios. These companies are chasing large addressable markets, and both stocks could soar 1,000% (or 11x) over the next decade under the right circumstances.
Upstart: AI-powered lending
Banks rely heavily on FICO scores when making credit decisions, but these three-digit credit scores are based on a relatively limited number of variables. That creates problems. Some applicants are unfairly rejected, while others are charged excessive interest to cover the losses of borrowers who should never have been approved.
Upstart wants to make the system more efficient. Its lending platform uses artificial intelligence (AI) to measure more than 1,500 data points per borrower — about 100 times more than traditional lending models — to help lenders more accurately quantify risk. According to management, Upstart’s AI models separate high-risk borrowers from low-risk borrowers with five times greater accuracy than FICO-based models.
Unfortunately, the current economic environment has been a serious obstacle for the company. Banks are less willing to lend to consumers struggling against high inflation, and consumers are less interested in borrowing when interest rates are rising. To that end, Upstart reported a 31% revenue slump to $157 million in the third quarter — a dramatic reversal from revenue growth of 250% last year — and the company reported a GAAP loss of $0.69 per diluted shares, compared to earnings of $0.30 per diluted share.
Worse, Upstart is a fledgling fintech and its AI platform has yet to be tested through a default phase in the credit cycle. This creates additional headwind. Lenders are even less likely to abandon familiar FICO-based lending models for new technology in the current environment. That’s why Wall Street is feeling particularly bearish about Upstart right now.
However, this also creates an opportunity for long-term investors. Based on credit data from the last four years, Upstart can quantify risk far more effectively than FICO-based models, meaning its AI platform can reduce loss rates for lenders. If this superiority continues during the current downturn, Upstart is likely to see a surge in adoption as the economy recovers.
With that in mind, Upstart currently operates personal loans, auto loans, and small business loans, which brings the total addressable market close to $1.5 trillion, but that number is expected to grow as the company continues to expand into new lending industries.
So why was this growth stock able to generate monster returns? Upstart appears to have a competitive edge in a multi-trillion dollar industry, and if revenue growth picks up again while inflation normalizes and interest rates fall, it’s not hard to imagine that its market cap — currently $1.5 billion -dollars – an 11x (or 1,000%) increase to $16.5 billion over the next decade.
At risk: AI-powered risk management
Riskified operates an AI-supported risk management platform. Its software helps online businesses increase approval rates and prevent checkout fraud, resulting in increased revenue and lower fraud-related operational costs. In fact, the top 10 riskified merchants have reported an 8% increase in sales and a 39% decrease in chargeback costs.
Of course, Riskified is in competition with other payment service providers such as e.g PayPal and MasterCard, but its platform integrates more deeply with its merchants’ infrastructure. That gives Riskified a data advantage that theoretically makes its AI engine better at correlating consumer behavior patterns with fraud risk.
The company reported encouraging financial results for the third quarter. Revenue rose 22% to $63 million and GAAP loss narrowed to $0.15 per share, a significant improvement from a loss of $0.82 per share a year earlier. In addition, management raised its full-year guidance, noting strong upselling momentum among larger companies (ie, those with more than $3 billion in online sales per year).
Looking ahead, Riskified could see huge growth in the coming years as its AI platform addresses a serious problem: false rejections will cost merchants $720 billion in 2022, and fraud will cost $25 billion by 2024 costs. However, Riskified has barely scratched the surface of Total Addressable Market (TAM). This year, the company will process approximately $100 billion in gross merchandise volume, but global e-commerce sales will be $5.7 trillion. Put another way, Riskified captured less than 2% of a large and growing TAM.
So why was this growth stock able to generate monster returns? If Riskified can easily accelerate revenue growth over the next decade, it’s entirely plausible that the company’s market cap — currently $814 million — could grow 11 times (or 1,000%) to about $9 billion .
Trevor Jennewine has positions in Mastercard and PayPal Holdings. The Motley Fool has positions in and recommends Mastercard, PayPal Holdings, Riskified Ltd. and Upstart Holdings, Inc. The Motley Fool has a disclosure policy.