This year has proven a good reminder that stocks don’t move up in a straight line. Since touching their respective closing highs between mid-November and the first week of January, the iconic Dow Jones Industrial Averagewidely tracked S&P 500and growth-dependent Nasdaq Composite have plunged as much as 19%, 24%, and 34%. While the Dow came within a bad day of ending in bear market territory, the S&P 500 and Nasdaq were firmly entrenched there.
If there’s a silver lining to the worst first-half to a year for the S&P 500 since 1970, it’s that bargains abound for patient investors. No matter how steep the major indexes decline, each and every notable drop throughout history has eventually been erased by a bull market. That makes the current bear market an excellent opportunity to go shopping for deals.
Arguably the best deals at the moment can be found among growth stocks. Although growth stocks had valuation premiums that made them susceptible to downside during the bear market, a handful of highly innovative, fast-paced companies look ripe for the picking. What follows are three disruptive growth stocks that can quadruple a $250,000 initial investment into a cool $1 million by 2030.
The first industry disruptor that has more than enough potential to generate a 300% return on a $250,000 investment over eight years is cloud-based lending platform Upstart Holdings (UPST 4.48%).
“Roller-coaster” might be the best way to define Upstart’s existence as a publicly traded company. Shares initially skyrocketed from around $30/share to north of $400 in just 10 months. Over the past 9-1/2 months, shares have retraced about 94% from their all-time high. This weakness since October is a reflection of growing concerns surrounding rapidly rising interest rates and US gross domestic product declines. Generally speaking, when the US economy has back-to-back quarters of GDP retracements, as we had in the first and second quarter of 2022, most investors will view it as a recession.
While there’s no denying or sugarcoating that Upstart’s preliminary results for the second quarter (Q2) reflect this weakness — the company expects to report roughly $228 million in Q2 sales on Aug. 8, 2022, versus a prior forecast of $295 million to $305 million in Q2 sales — there are a number of reasons for long-term investors to be encouraged by this disruptor.
For starters, Upstart is completely changing the way loans are being vetted. The company’s artificial intelligence (AI)-driven platform has been able to completely automate and approve approximately three-quarters of all loan applicants. When compared to the traditional loan approval process, this saves considerable time and money for lending institutions.
Equally important but often overlooked is the fact that Upstart’s AI-lending platform broadened the number of applicants being approved. By this I mean that the average credit score of Upstart-vetted loan applicants was lower than the traditional process. However, the delinquency rate for Upstart-processed loans versus the traditional process have been similar. This demonstrates that Upstart’s AI-driven platform works, and that it can bring banks and financial institutions more customers.
Something else to consider is that Upstart is literally scratching the surface with regard to its addressable markets. To date, it’s primarily focused on personal loan applications, which is a $112 billion market. However, it’s begun moving into auto loan originations (a $751 billion market), and will likely advance into mortgage loan originations (a $4.5 trillion market) in the future.
If Upstart investors are patient and allow the company’s disruptive platform to develop over time, I believe they’ll be pleasantly surprised by the result.
A second disruptive growth stock that can turn $250,000 into $1 million by the turn of the decade is a specialty e-commerce stock Etsy (ETSY 0.05%).
Although Etsy hasn’t had as wild of a ride as Upstart, it’s still taken its shareholders on quite the adventure. Shares of the company have nearly lost two-thirds of their value since hitting an all-time high in November. The rising prospect of a US recession, as evidenced by back-to-back quarters of gross domestic product retracements, and historically high inflation of 9.1% in June 2022, has Wall Street clearly concerned about consumers’ ability to spend, at least in the short run. But this doesn’t come close to telling the full story on Etsy.
What makes Etsy such an amazing company is its operating model. Most online retail companies are built for volume, which makes the buying process highly impersonal. As for Etsy, it’s entire platform is built around a base of thousands of small businesses and sole proprietors. These are businesses creating unique merchandise that are willing to work with buyers on a personal level to customize products. Even as the retail landscape grows more competitive, there really isn’t a direct competitor to Etsy’s operating model, based on scale.
Another reason Etsy can make patient investors millionaires in eight years is its ability to bring back shoppers to its platform, as well as encourage existing buyers to become more active. In the June-ended quarter, the company noted that its marketplace acquired roughly 6 million new buyers.
Arguably more important is the fact that, between the end of 2019 and the end of 2021, the number of habitual buyers grew by (drum roll) 224%! Etsy defines a “habitual buyer” as someone who makes at least six purchases over the trailing-12-month period, with the aggregate of those purchases totaling at least $200. It’s pretty evident that the company’s investments in video and easier site navigation are helping to keep buyers engaged.
Lastly, don’t overlook Etsy’s pricing power. Despite pushback from sellers following an announcement that Etsy would raise fees, the company ended June with more than 7,400 active sellers, up from around 5,200 in the comparable period in the previous year.
Etsy has all the tools necessary to quadruple investors’ money, if they’re patient.
The third disruptive growth stock that can turn $250,000 into $1 million by 2030 is furniture stock Lovesack (LOVE -0.46%). YesI said “furniture stock” and “disruptive” in the same sentence.
Generally, the furniture industry is stodgy and slow-growing. It’s heavily reliant on foot traffic into brick-and-mortar retail stores, with most furniture retailers purchasing products from the same small group of wholesalers. It’s a low-margin, boring operating model that’s come under pressure with soaring inflation and contracting GDP. However, Lovesac is looking to turn this dinosaur of an industry on its head.
The first thing to note about Lovesac is the company’s unique furniture. While the company was initially known for its beanbag-styled chairs known as “sacs,” approximately 88% of net sales these days come from selling sactionals. A “sactional” is a modular couch that can be rearranged dozens of ways to fit virtually any living space. In short, Lovesac’s furniture provides function well beyond what traditional retailers can offer.
Another differentiating factor is choice. Lovesac’s sactionals have a variety of upgrade options buyers can take advantage of, including wireless charging stations and built-in surround-sound systems. What’s more, there are more than 200 cover choices, meaning buyers can rest assured their section will match the color and/or theme of their home.
Lovesac is also at the forefront of ESG investing — at least within the bounds of the furniture industry. The yarn used in sactionals is made entirely from recycled plastic water bottles, which makes the company’s products ecofriendly.
But perhaps the biggest difference from traditional furniture retailers, and Lovesac’s greatest advantage, is its omnichannel sales platform. During the COVID-19 pandemic lockdowns, the company seamlessly shifted about half of its sales online. Couple this strong direct-to-consumer presence with brand-name partnerships and pop-up showrooms and you have a recipe for significantly lower overhead and higher margins. It’s no wonder Lovesac achieved recurring profitability two years ahead of Wall Street’s forecast.
As one final note, consider that Lovesac’s products tend to be pricier than furniture found in traditional retail stores. With a middle-to-upper-income clientele, Lovesac’s consumer is less likely to be adversely impacted by rapidly rising inflation and/or the prospect of a recession.