- Upstart is disrupting the stodgy consumer lending industry with eye-popping results.
- Lemonade is chasing an addressable market in the trillions.
- Acquisitions and industry growth should lead to healthy increases in Teladoc.
Investors are always on a quest for the next big thing. Finding stocks that can multiply many times their original cost basis, commonly referred to as multibaggers, is the holy grail for many investors. The rarest in this already scarce breed of stock is the 10-bagger -- an investment that increases tenfold from its original stock price. Finding stocks with explosive potential early in their lifecycle is a particularly difficult task. If bought early and held through the inevitable ups and downs, however, a 10-bagger can be a life-changing investment.
With that in mind, we asked a group of Motley Fool contributors to give us their best ideas for disruptive growth stocks that could ultimately become 10-baggers. They offered up Upstart Holdings (NASDAQ:UPST), Lemonade (NYSE:LMND), and Teladoc Health (NYSE:TDOC).
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Disrupting loan approvals
Danny Vena (Upstart Holdings): If theres ever been an area thats ripe for disruption, its consumer lending. The financial industry relies heavily on an outdated system to decide the creditworthiness of consumers. Unfortunately, the rules-based systems employed by many banks are limited to just a few variables, leaving many would-be loan recipients out in the cold. Not only that, but some creditworthy consumers pay far too much for their credit. Thats where Upstart Holdings comes in.
The fintech company leverages the power of artificial intelligence (AI) to provide a more accurate representation of loan risk. Upstarts sophisticated algorithms and robust financial modeling considers more than 1,000 variables when assessing credit risk, thereby more accurately predicting loan repayments. Its rapidly growing dataset includes more than 10.5 million repayment events and its predictive power improves with each new loan.
Upstarts AI model has been a boon to consumers, resulting in 27% more borrowers getting loans than from banks using traditional lending models. As an added bonus, they typically get better borrowing rates, with a 16% lower annual percentage rate (APR) for approved loans.
Its also a win for the banks, as Upstarts system helped banks lower loss rates by nearly 75% while approving the same number of loans.
The banking industry is sitting up and taking notice. In the second quarter, Upstarts revenue grew to $194 million, up more than 1,000% year over year. To put that number in context, the company generated revenue of just $233 million for all of 2020.
Thats not all. Upstart has generated a profit in each of the three quarters since going public late last year. In the second quarter, net income of $37.3 million was much improved from a loss of $6.2 million in the prior-year quarter.
Blowout customer metrics helped drive the companys financial results. Upstarts banking partners originated 286,864 loans worth $2.8 billion, up 1,605% year over year, while the conversion on rate requests was 24%, up from 9%.
The company expects its robust performance to continue. Upstart is guiding for full-year revenue of $750 million, more than tripling from $233 million in 2020.
Theres also Upstarts sizable addressable market of $92 billion in unsecured loans alone. The company is targeting adjacent opportunities in the auto loan, credit card, and mortgage loan markets, opening its market to a whopping $4.3 trillion.
Upstart has a market cap of less than $14 billion. Considering the secular tailwinds driving its growth, its performance thus far, and the companys massive addressable market, its easy to envision Upstart joining the ranks of 10-baggers from here.
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Industry disruption in progress
Brian Withers (Lemonade): Lemonade started selling rental insurance policies in September 2016, and just five short years later, its got a book of almost $300 million in rental, homeowners, pet, and life insurance. But this upstart has more up its sleeve. Its announced Lemonade Car auto insurance and expects that product to come to market in the next year. This insurance provider with a digital-first, customer-centric approach has taken the industry by storm and is racking up impressive growth numbers.
In force premium
Annual dollar retention
Data source: Company shareholder letter. Note: All metrics above are reported as measured at the end of the quarter. QOQ = quarter over quarter. YOY = year over year.
Its torrid premium growth comes from a combination of new customers and existing customers spending more. This additional spending comes from renters moving up to become homeowners or adding pet or life insurance to existing policies. Annual premiums per customer hit a record $246 this quarter, up 29% year over year. It doesnt hurt having improved annual dollar retention (as fewer customers leave). These numbers are stellar, but with the upcoming launch of auto insurance, the company had additional expenses in the quarter. As a result, its net loss widened, sending the stock down after the earnings report. This reaction is short-sighted, as this upstart has a huge runway of opportunity ahead.
The company is projecting to end the year with in force premiums at a $380 million run rate and at least $123 million in revenue. These projections dont include any benefit from its auto insurance product. Its estimated that Lemonade customers are spending more than $1 billion on auto insurance with other companies today. CEO Daniel Schreiber said on the earnings call, Wed like to believe that theyd rather spend that with Lemonade, but that option has not been available. When its auto insurance product is launched, it could accelerate growth even more.
As the company expands its products, customer base, and regional presence, its eyeing the approximately $5 trillion in annual spend on property, casualty, and life insurance premiums globally. Investors interested in a stock that has the runway and capability to increase its current market capitalization tenfold should look no further than this upstart insurtech.
Image source: Getty Images.
A telehealth leader poised for recovery
Will Healy (Teladoc Health): Teladoc has led the way in providing telehealth services via a PC or mobile device. Grand View Research described telehealth as a $56 billion industry, forecasting a compound annual growth rate of 22% through 2028. Such growth could take Teladoc, which now supports a market cap of approximately $24 billion, much higher in the coming years.
However, Teladoc faces competition on several fronts. Companies such as Doctor on Demand and MDLIVE compete in this space. Also, Amwell, which launched its IPO in 2020, attracted $100 million in investment from Alphabets Google.
To address these threats, Teladoc has continually upgraded its offerings, the latest improvement coming from its $18.5 billion acquisition of Livongo Health that it completed last year. Livongo provides monitoring of diabetes and other health-related issues, giving doctors a treasure trove of health data that they can utilize to evaluate patients.
Additionally, Teladoc has worked to enlarge its international presence. It bought Advance Medical in 2018, a company that provides telehealth services to more than 125 countries. Also, this global buildout continued in Q2 as Teladoc expanded in Brazil through a partnership with Vivo.
Patients both within and outside of the U.S. continue to flock to the platform. Teladoc recorded over 8.8 million patient visits and sessions in the first half of 2021. This is an 84% increase from the first half of 2020, a time when millions of patients turned to telehealth amid lockdowns.
These patient counts helped revenue for the first two quarters of 2021 come in at $957 million, a 127% increase compared with the first six months of 2020. This success also led Teladoc to increase its full-year revenue guidance to just over $2 billion, a level that would bring an 83% increase from 2020 levels.
Moreover, investors can buy Teladoc on sale. It is down by about 23% from year-ago levels and has lost nearly half of its value since February, as heavy losses and rising competition spooked investors. Consequently, its price-to-sales (P/S) ratio of 12 has fallen to just above pre-pandemic levels. With its added capabilities and its ability to grow its patient counts post-pandemic, Teladoc stock holds tremendous potential to climb significantly over the next few years.
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.Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Brian Withers owns shares of Lemonade, Inc. and Teladoc Health. Danny Vena owns shares of Alphabet (A shares) and Teladoc Health. Will Healy has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amwell, Lemonade, Inc., Teladoc Health, and Upstart Holdings, Inc. The Motley Fool has a disclosure policy.>
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