The past two months have been a breath of fresh air for growth and technology investors who have seen their investments pummeled since last year. Some stocks have doubled and tripled quickly, so we might want to remain cautious, since stocks are typically volatile over the short term.
But there's a bigger picture here. The Federal Open Market Committee (FOMC) chose to skip hiking interest rates in June, signaling that the economy and markets could be near the climax of an aggressive hiking policy that has spanned the past year or so.
Lower rates are typically friendly to growth stocks (or at least ceasing rate hikes), so here are three hot names that could continue outrunning the market over the next several years.
1. SoFi Technologies
After a painful two-year slide, digital bank SoFi Technologies (SOFI 1.79%) has caught fire, with its share price nearly doubling over the past month. What caused such a violent turn in sentiment?
The U.S. government recently passed a law to lift America's debt ceiling, which included a provision to end the student loan freeze that was put in place during COVID-19. This unfreezes a big business for SoFi, which refinances many student loans.
At a Piper Sandler conference, CEO Anthony Noto recently estimated that student loan refinancing is a roughly $200 billion opportunity. SoFi won't refinance every piece of that pie, but the opportunity could drive growth, given that SoFi's 2022 student loan volume was just $2.2 billion.
Meanwhile, SoFi is thriving as a digital bank. The company's users increased from 2.2 million in the first quarter of 2021 to 5.6 million in Q1 of 2023. The company operates primarily in the United States, where the population isn't growing nearly that fast, so this increase indicates that SoFi is taking business from other banks.
SoFi Price-to-Book Value data by YCharts.
SoFi's rapid rise placed the stock's valuation above those of the financial sector's biggest names, but keep in mind how much faster SoFi is growing. SoFi is increasing net interest income (a bank's received interest on loans minus the interest paid on deposits) much faster because of how quickly it's picking up members. Investors holding for the years ahead could see the stock easily outrun its current valuation if SoFi keeps growing as it has.
2. Upstart Holdings
Tolerating extreme volatility in stock prices isn't easy, but it can create enormous opportunities for investors. Take Upstart Holdings (UPST 6.47%), for example. The stock has appreciated by 180% since the beginning of the year but is still down 90% from its prior highs.
Upstart uses artificial intelligence to assess borrowers for loans. The company thrived when interest rates were low, but the rapid rate hikes in 2022 hindered the business and cratered the stock.
However, Upstart has continually published data supporting how effective its AI is at identifying risky borrowers, and banks have continued partnering with Upstart. The company also successfully pursued committed funding for its loans, which helps protect it from the risk of loan buyers drying up when interest rates quickly increase. These fundamental improvements in Upstart's business have given investors more confidence in its long-term future, which has turned sentiment positive and helps explain the stock's recent upward sprint.
The stock was beaten down so heavily in 2022 that it remains attractive in 2023 despite its rebound. The company's market cap is less than $3 billion today, and it operates in a massive addressable market with thousands of potential lending partners and more than a trillion dollars in possible loan volume. Also, Upstart was profitable in 2021 before interest rates rose, so it could profitably grow for years to come if it can solve its cyclical problems with more committed funding agreements.
3. SentinelOne
Proprietary data like information about customers is vital as the economy becomes increasingly digital, so cybersecurity should remain a high priority for enterprises worldwide. That's a terrific potential opportunity for an innovative security company like SentinelOne (S 4.94%). It uses artificial intelligence to hunt for and eradicate threats on the electronic devices and networks it protects on its Singularity platform.
SentinelOne's product is highly regarded in its field -- it was labeled a leader in endpoint security by third-party research company Gartner. The company has 10,680 customers, including five of the Fortune 10. SentinelOne is growing rapidly, and while the business is not yet profitable, its operating margin has improved with revenue growth, a positive sign for future profitability.
SentinelOne Revenue (TTM) data by YCharts.
The stock came public in 2021 at an absurdly high valuation, a price-to-sales ratio (P/S) of more than 100. Today, that ratio is down to less than 10, the result of a bear market in 2022 and dimming market sentiment because competitors like CrowdStrike outpaced SentinelOne in their most recent respective quarters.
But the company has a market value of just $4.3 billion right now. And the global cybersecurity market is worth an estimated $172 billion and could grow to surpass $420 billion by 2030. SentinelOne's strong product in a large and growing industry makes the stock too tempting to ignore today.
Justin Pope has positions in SentinelOne and Upstart. The Motley Fool has positions in and recommends CrowdStrike and Upstart. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.
