According to the U.S. Department of Labor, the consumer price index rose 7.9% in February, marking the fastest growth in inflation since 1982. Of course, rising prices tend to curtail consumer spending, creating a difficult business environment. And that concern has sparked a significant downturn in the broader market. In fact, the tech-heavy Nasdaq Composite has plunged 13% from its high, putting the index in correction territory.
Of course, many individual stocks have fallen much further. Upstart Holdings ( UPST 7.63% ) and MercadoLibre ( MELI 3.17% ) are down 68% and 40%, respectively, despite the fact that both companies have consistently delivered strong financial results. But there is a silver lining: The ongoing broad-based sell-off creates a buying opportunity for long-term investors.
Here’s why you should consider adding Upstart and MercadoLibre to your portfolio.
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1. Upstart Holdings
Fair Isaac was founded in 1956, and its credit risk solution — the FICO score — has become a fixture in the lending industry. In fact, Fair Isaac’s clientele includes 95 of the 100 largest financial institutions in the U.S. and half of the top 100 banks in the world. But Upstart is looking to disrupt that dominance. It does away with traditional credit-score-based lending models, relying instead on more modern technology.
Specifically, Upstart leans on big data and artificial intelligence to help banks and credit unions quantify risk, underwrite loans, and automate the lending process. Its platform collects over 1,500 details per applicant and measures those data points against 21.6 million (and counting) repayment events. To that end, each time a borrower makes or misses a payment, Upstart’s AI models get a little smarter.
Why does that matter? By more precisely quantifying risk, Upstart helps its partners approve more loans and offer lower interest rates, all while keeping loss rates low. In fact, a report from the Consumer Financial Protection Bureau suggests that Upstart’s AI models approve 27% more applicants than traditional credit models, and they do so with 16% lower average interest rates.
Not surprisingly, that value proposition has translated into phenomenal growth. Upstart finished 2021 with 38 bank partners on its platform, up more than threefold from 2020. Better yet, total transaction volume grew 241% to $11.8 billion, revenue skyrocketed 264% to $849 million, and the company generated GAAP net income of $135 million, up from $6 million in 2020.
Going forward, management puts its current addressable market at $823 billion, a figure that includes the personal and auto lending verticals. But the company plans to expand its platform, eventually entering the $4.6 trillion mortgage origination market and the $644 billion small business loans market. In short, Upstart’s AI-powered business model is disrupting a multi-trillion-dollar industry. That’s why this growth stock looks like a smart long-term investment.
2. MercadoLibre
MercadoLibre operates across 18 countries in Latin America, and its business spans two high-growth industries: e-commerce and digital payments. Better yet, it’s the market leader in both cases. Its online marketplace averages 668 million visits per month, nearly four times more than the next closest competitor, and its fintech platform (Mercado Pago) has helped democratize digital payments in a region where relatively few people have a bank account or debit card.
To further solidify its leadership, MercadoLibre has built a sizable logistics network that simplifies shipping for sellers, accelerates delivery for buyers, and lowers costs for the company. In the fourth quarter of 2021, nearly 90% of items sold on the marketplace were shipped through its managed logistics channels. That’s up from 77% in Q4 2020. In other words, merchants are becoming increasingly dependent on MercadoLibre.
Not surprisingly, that translated into a strong financial performance last year. Gross merchandise volume (GMV) rose 35% to $28.4 billion. Better yet, MercadoLibre’s take rate hit 16%, up from 12% in 2020. In other words, MercadoLibre is keeping a greater percentage of GMV, which showcases its pricing power. As a result, revenue rocketed 78% higher to $7.1 billion in 2021. Profits came in at $1.69 per diluted share, up from a loss of $0.07 per diluted share in the prior year.
More importantly, there is plenty of room for future growth. Online retail sales are expected to reach $160 billion in Latin America by 2025, according to Statista. That should be a significant tailwind for MercadoLibre’s commerce and fintech businesses. And with the stock trading at 8.3 times sales — well below its five-year average of 13.8 times sales — now looks like an excellent time to buy a few shares.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
