Legendary investor Peter Lynch once said, “All you need to successfully invest in your life are a few big winners, and the benefits of those will outweigh the harms of stocks that don’t work.” not.” This is because the worst thing that can happen when you buy a stock is a 100% loss, but there is no upper limit. The right stock can easily increase its value tenfold.
With this in mind, companies like Assets received ( UPST -5.02% ) and Latch ( LTCH -6.05% ) are growing rapidly, and I think these two stocks could each deliver 10x returns to shareholders over the next decade. Here’s why.
1. Assets received
Upstart is a fintech company whose mission is to make consumer credit more accessible. Traditional lending models are built around the FICO score (created and managed by Just Isaac), a metric calculated from no more than 20 variables. Unfortunately, the limited scope of this data means that banks often fail to properly quantify an applicant’s risk when making lending decisions. As a result, some creditworthy borrowers are excluded from the system, while others pay too much interest because they have to subsidize the portion of borrowers who will inevitably default.
In an effort to modernize this system, Upstart is leveraging big data and artificial intelligence (AI) to help lenders more accurately quantify risk. Its platform captures over 1,500 data points per application and measures these variables against 21.6 million redemption events (and counting). This creates a network effect because each time a borrower makes or misses a payment, Upstart’s predictive engine gets a little smarter.
Compared to traditional credit models, internal studies have shown that Upstart’s AI-powered platform can approve 173% more borrowers while keeping loss rates constant, or it can reduce loan loss rates. 75% loss while keeping approval rates constant. No matter how you cut it, it means lenders make more money, and that value proposition is growing Upstart like wildfire.
In 2021, the number of banking partners on its platform more than tripled and transaction volume jumped 241% to $11.8 billion. In turn, revenue soared 264% to $849 million last year, and the company generated free cash flow (FCF) of $153 million, 15 times more than it only was $10 million in 2020. But this disruptive fintech company is just getting started.
Upstart currently works in personal and auto lending, two verticals collectively valued at over $820 billion. But management sees room to expand into areas such as mortgages and small business lending, which would add more than $5 trillion to its total addressable market (TAM). In short, Upstart has captured less than 2% of its current TAM and well under 1% of its potential TAM. But if this $8.5 billion company continues to rapidly increase its revenue, I think the stock could grow tenfold over the next decade.
Latch specializes in smart building technology. Its platform includes a range of devices such as door-mounted smart locks, intercoms and delivery aids, all powered by LatchOS software. Latch’s technology allows apartment managers to control access permissions remotely. It creates a premium experience for tenants, allowing them to unlock doors, admit guests, and control smart home devices from a mobile app.
Collectively, Latch estimates that the efficiencies created by smart lock technology can reduce expenses by $100-300 per apartment per year and the benefits can increase revenue by $200-500 per apartment per year. Additionally, while most competitors only address part of the smart building experience, Latch offers a full range of hardware, software and services that meet all of its customers’ needs.
Unsurprisingly, this competitive advantage has resulted in strong demand. Today, 3 out of 10 new apartments in the United States are equipped with Latch technology, but its smart locks are also used to retrofit existing buildings. Collectively, the strength of this industry helped Latch grow its revenue by 129% to $41.4 million in 2021. Total bookings jumped 118% to $360.2 million, implying strong growth future income. On a less optimistic note, Latch is still not profitable on a generally accepted accounting principles (GAAP) and generated negative FCF of $115 million last year. However, with $284 million in cash and investments on its balance sheet, Latch can afford to invest aggressively in growth for another year or two debt-free. Management has previously indicated that the company will achieve a positive FCF by 2023.
Looking to the future, Latch has plenty of room to grow its business. It has booked about 590,000 apartments in North America, but management pegs its TAM at 32 million units. In other words, Latch captured less than 2% of its MAP from apartment buildings. But the company has recently expanded into commercial office space, which means its TAM is getting bigger. If Latch continues to perform, shareholders could see huge returns over the next decade. I think that $630 million business could grow tenfold (or more) over that time.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging 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 wealthier.