2 growth stocks down 80% and 93% that billionaires are buying on the downside

Growth stocks have sold off strongly this year in response to high inflation and rising interest rates, but these macroeconomic forces have been particularly devastating in certain industries. For example, the fintech lender Assets received (UPST 0.75%) and e-commerce software publisher Shopify (STORE 2.52%) saw their stock prices plunge 93% and 80%, respectively. But some billionaires were still buying the shares in the second quarter.

For example, Jim Simons of Renaissance Technologies increased his stake in Upstart and started a position in Shopify. Meanwhile, Bridgewater Associates’ Ray Dalio doubled down on Upstart, and Two Sigma Advisers’ David Siegel increased his position in Shopify.

Is it time to buy those growth stocks?

Upstart is on a mission to disrupt the credit industry

Upstart seemed unstoppable last year. It grew revenue 264% to $849 million in 2021 and generated GAAP profit of $135 million. But the story is quite different this year. High inflation has made lenders more hesitant to extend credit, and rising interest rates have deterred some borrowers from taking on debt. This led to downright disappointing financial results in the second quarter. Upstart saw its revenue increase just 18% to $228 million, and the company reported a GAAP loss of $30 million.

Despite these results, Upstart has nearly tripled the number of banks and credit unions on its platform, and these lenders have seen Upstart-powered loan returns that consistently meet or exceed expectations. Investors still have reason to be bullish on Upstart as its disruptive approach to lending appears to be taking hold.

Traditionally, lenders have made credit decisions with relatively limited amount information. Even the most sophisticated credit models often incorporate no more than 30 variables, and this lack of data leads to poor decisions. Some creditworthy applicants are turned down, and others pay too much interest to subsidize borrowers who inevitably default (i.e. those who should never have been approved).

To address these inefficiencies, Upstart takes an entirely different approach. Its platform captures over 1,500 data points per requestor and uses machine learning (a type of artificial intelligence that improves over time) to measure those data points against past refund events. This theoretically allows Upstart to quantify risk more accurately, leading to lower loss rates for lenders. At this point, data provided by the company does indeed suggest that its machine learning models predict risk more accurately than traditional credit models.

As a caveat, Upstart’s software has not been tested during an economic downturn, which means the current environment – runaway inflation and rising interest rates – is uncharted territory. And the sharp deceleration in income means some lenders are worried. Upstart’s future success depends on its ability to allay these concerns by quantifying risk more accurately than traditional credit models throughout the current recession.

That being said, Upstart’s machine learning models appear to be a competitive advantage (at least in a favorable economic environment), and the company pegs its addressable market at $1.5 trillion in trading volume, leaving plenty of room for growth. With stocks trading at a relatively low price of 2.5 times sales, I think it’s worth building a small position in this growth stock at this time.

Shopify works to simplify commerce

Shopify has struggled alongside the wider retail industry this year. High inflation has forced consumers to prioritize basic necessities like food and fuel over discretionary purchases, and the impact of this trend has been amplified by the deceleration in online shopping following the pandemic.

Unsurprisingly, Shopify delivered a disappointing second quarter financial performance. Revenue rose just 16% to $1.3 billion and the company generated an operating loss of $190 million. That being said, Shopify remains the leading e-commerce software platform in terms of market presence and user satisfaction, and it has continued to gain market share in both online and offline retail sales in the States. States in the second quarter. Additionally, investors have good reason to believe that Shopify will continue to capitalize on the growing adoption of e-commerce globally, a market that is expected to reach $5.5 trillion this year.

Shopify is already the retail operating system for over 2 million businesses. Its software simplifies omnichannel commerce by allowing merchants to manage sales across physical and digital channels from a single location. This includes popular online marketplaces like Amazon and Etsyand social media like Metaplatforms‘Facebook and Instagram. But this also includes direct-to-consumer (DTC) websites. This distinctive trait is especially important because DTC business models give merchants more control over the shopper experience, which in turn builds lasting relationships with customers.

Shopify also provides value-added solutions such as payment processing, fund management accounts, and cross-border commerce tools. Merchants can also access thousands of third-party integrations through the Shopify App Store, including payroll, marketing, and enterprise resource planning tools.

Even better, Shopify recently completed its $2.1 billion (cash and stock) acquisition of logistics service provider Deliverr, a move that will accelerate the building of the Shopify Fulfillment Network (SFN). This could ultimately help Shopify compete more directly with Amazon, as DFS will allow Shopify merchants to offer next-day and two-day shipping to shoppers across the United States. Management expects the project to reach full scale in late 2023 or early 2024.

Currently, Shopify shares are trading at 8.7 times sales – a real bargain compared to the five-year average of 30.1 times sales. And given its strong presence in a large and growing market, I think it’s worth buying this downside growth stock.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a board member of The Motley Fool. Trevor Jennewin has positions at Amazon, Etsy and Shopify. The Motley Fool has positions and recommends Amazon, Etsy, Meta Platforms, Inc., Shopify, and Upstart Holdings, Inc. The Motley Fool recommends the following options: $1140 Long Calls January 2023 on Shopify and 1160 Short Calls $ in January 2023 on Shopify. The Motley Fool has a disclosure policy.

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