Investing in beaten-down stocks with high growth potential could be a rewarding contrarian investment strategy. E-commerce giant Shopify (TSX:SHOP) stock has fallen 76% so far this year while shares in credit evaluation services provider Upstart Holdings (NASDAQ:UPST) traded nearly 85% lower year to date. Both growth stocks have room to recover but during different time frames. Here’s an evaluation of which growth stock between Shopify and Upstart could be a better buy for outsized returns.
Shopify offers an e-commerce platform of choice to whoever has dreams and ambitions of owning a business in 175 countries.
Upstart Holdings is a disruptor of the traditional lending business. Its artificial intelligence-powered platform revolutionized credit evaluation processes to include non-traditional metrics. It has reported triple-digit growth rates lately. However, economic headwinds in 2022 have disrupted Upstart’s business model, the company is loading up more risks to its balance sheet, and investors have freaked out.
Upstart stock plunged in 2022
Better near-term growth: Shopify vs. Upstart Holdings
Shopify is a domestic stock that enjoyed spectacular revenue and earnings-growth rates exceeding 50% per annum during the COVID-19 pandemic. Online shopping trends have normalized with re-openings. Financial analysts expect Shopify to grow sales by 19% in 2022 before revenue surges by a further 24% in 2023. The business is still growing at double-digit rates.
Upstart faces a declining business environment, as its customers cautiously navigate tight economic headwinds while interest rates surge. Management guided for a 25% sequential revenue decline for the third quarter. Wall Street analysts estimate Upstart Holdings’s revenue-growth rate to decline to just above 6% for 2022 and hover around 6.7% for the year 2023.
In comparison, Upstart reported a staggering 264% sales growth in 2021 and a 42% revenue surge in 2020.
Better near-term profitability profile
Shopify’s outsized investments in fulfillment operations and other business verticals during the pandemic increased the company’s operating cost profile. The business has plunged back into net losses. Staff layoffs and cost rationalizations are yet to prove their effectiveness this year.
Encouragingly, Wall Street analysts estimate Shopify’s losses will narrow significantly from $0.15 per share for 2022 to $0.03 per share next year. Perhaps SHOP stock investors may see positive net earnings by 2024.
Upstart Holdings stock beats Shopify on profitability. Its legacy business has better operating margins, and Upstart is expected to remain a profitable business in 2023, despite credit market headwinds.
Unlike Shopify, which plunged into losses in 2022, Upstart remains profitable. Analysts estimate that Upstart Holdings will generate US$0.73 a share in net earnings for this year. Earnings for 2023 could surge to US$1.38 per share. If you desire to invest in a profitable, disruptive, young business that could nearly double its earnings next year, Upstart stock is your best bet.
Watch Upstart’s rising business risk profile
After several years of organically growing the business, Shopify is nearly a mature business with a strong balance sheet now. The business remains well funded with nearly US$7 billion in cash, cash equivalents, and short-term investments by mid-year this year. Its business risk profile looks stable, although battles with Amazon.com remain fierce, and internal projects aren’t as mature yet.
The same cannot be said about Upstart Holdings, which faces a new strategic risk. The company’s recent move to start lending to evaluated customers widely strayed from its revolutionary business model.
As a new lender, Upstart has growing credit risks, which could mess up its balance sheet. The company may be compelled to raise new financing at unfavourable terms during a difficult season in the capital markets. Dilution is a significant risk for investors in Upstart Holdings stock and a distant worry for Shopify stock investors.
Investor takeaway
Suppose you desire to invest in a relatively faster-growing, well-established business with potentially lower business risk, global operations, and narrowing losses. In that case, Shopify stock could be a better bet right now.
That said, Upstart stock could violently surge if its new lending portfolio proves superior with lower default rates compared to other industry loan books during a recession. More lenders (customers) could flock to its credit evaluation services in droves, and the business could return to triple-digit growth as soon as current economic headwinds die down.
