KEY POINTS: TECH SELL-OFF BUYS
- Upstart assists banks in making more efficient loans by using big data and artificial intelligence.
- In Latin America, MercadoLibre has revolutionized the trade and payments industries.
According to the US Department of Labor, consumer prices increased 7.9% in February, the most significant rise in inflation since 1982. But, of course, rising costs tend to reduce spending, posing a challenging operating environment. And that fear has sparked a substantial sell-off across the board. The Nasdaq Composite (^IXIC) has fallen 13% from its highs, putting it on track for a correction. Meanwhile, the sell-off will inevitably create tech stock buying opportunities.
Many individual equities have tumbled much further. For example, although both firms have delivered excellent financial results, Upstart Holdings (NASDAQ:UPST) and MercadoLibre (NASDAQ:MELI) are down 68% and 40%, respectively, demonstrating how quickly even the most well-known names can fall out of favor. However, there is a silver lining: The continuing broad-based selling bodes well for long-term investors looking to profit in this challenging market environment.
Here’s why tech stocks Upstart and MercadoLibre, caught in the current sell-off, are worth considering.
The FICO credit score, created in 1956 by Fair Isaac (NYSE:FICO), has become a standard in the lending business. Fair Isaac serves over 95% of the top 100 financial institutions in the United States and half of the world’s top 100 banks. However, Upstart Holdings is aiming to upset that status quo. It replaces traditional credit-score-based lending methods with cutting-edge technology instead.
Upstart’s product leverages big data and artificial intelligence to assist financial institutions in quantifying risk, underwriting loans, and automating the loan approval process. Its platform collects over 1,500 information points on each applicant and compares them against 21.6 million (and growing) repayment events. As a result of this learning, Upstart’s AI becomes more sophisticated with each payment that a borrower makes or misses.
Why is this important? According to a study from the Consumer Financial Protection Bureau, Upstart’s AI models approve 27% more applicants than traditional credit models and do so with 16% lower interest rates.
That value promise has resulted in enormous expansion. Upstart ended 2021 with 38 bank partners on its platform, up more than threefold from 2020. Furthermore, transaction volume increased by 241 percent to $11.8 billion, revenue climbed by 264 percent to $849 million, and the firm’s GAAP net income rose from $6 million to $135 million during the same period.
Management now projects that its addressable market will be $823 billion going forward, including personal and automobile lending verticals. In addition, the firm intends to expand its platform to enter the $4.6 trillion mortgage originator market and the $644 billion small business loans market. In short, Upstart’s AI-powered business model is upending a multi-trillion-dollar sector. That’s why this growth stock seems like a solid long-term investment, and one tech sell-off stock worth considering.
Although it began in Argentina, MercadoLibre quickly expanded to include 18 nations in Latin America. It also operates in two fast-growing sectors: e-commerce and digital payments. Furthermore, it is the market leader in both cases. Its online marketplace sees 668 million visits each month, almost four times as many as the closest competition. In addition, its fintech platform (Mercado Pago) has aided the democratization of digital payments in areas where few people have a bank account or debit card.
To secure its position, MercadoLibre has established an extensive logistics infrastructure that alleviates shipping for sellers, speeds delivery for consumers, and lowers costs for the company. During the fourth quarter of 2021, almost 90% of items sold on the market used MercadoLibre’s managed logistics channels. That’s up from 77% in Q4 2020. In other words, merchants are relying more heavily on MercadoLibre.
That, predictably, resulted in a solid financial performance last year. GMV increased 35% to $28.4 billion in 2021. MercadoLibre’s take rate rose to 16%, compared with 12% in 2020. To put it another way, MercadoLibre is maintaining a greater proportion of GMV, showing its pricing power. Consequently, revenue climbed 78% to $7.1 billion in 2021. Profits totaled $1.69 per diluted share versus a loss of $0.07 per diluted share the prior year.
There’s even more room for development in the future. According to Statista, online retail sales in Latin America should reach $160 billion by 2025. That should be a big boost for MercadoLibre’s commerce and fintech operations. And with shares currently selling at just 8.3 times sales, now appears to be an opportunity to buy this tech sell-off stock.