With the exception of the energy sector, there weren’t too many bright spots last year. Each of the three major U.S. stock indexes plummeted into a bear market, with the growth-focused Nasdaq Composite — the index responsible for lifting the stock market to new highs in 2021 — taking it on the chin with a loss of 33%.
However, big declines can sometimes lead to big opportunities for patient investors. With growth stocks getting absolutely clobbered in 2022, there is no shortage of potential turnaround candidates in the new year. Based on price targets from a select group of Wall Street analysts, the following three turnaround stocks offer upside potential ranging from 148% to 195% in 2023.
Upstart Holdings: Implied upside of 152% in 2023
The first turnaround stock with triple-digit upside potential in the new year is cloud-based lending platform Upstart Holdings (UPST 8.37%). Despite plunging as much as 97% from its all-time high set in 2021, Citigroup analyst Peter Christiansen foresees shares of the company reaching $33. This would represent upside of as much as 152% this year.
The clear-cut issue for Upstart is the Federal Reserve’s hawkish monetary policy. With the U.S. inflation rate hitting a more-than 40-year high of 9.1% this past June, the nation’s central bank has responded by increasing its federal funds rate at the fastest pace in four decades. As rates increase, the desire for consumers and businesses to take out loans decreases. Additionally, it’s not uncommon for loan delinquencies to rise as rates climb, which can cause banks and credit unions to think twice before handing out loans.
While high interest rates are less than ideal for a lending platform, Upstart has well-defined competitive advantages that should come into play when the pace of interest rate hikes slows this year.
The biggest differentiator for Upstart is that its cloud-based lending platform relies on artificial intelligence (AI) and machine learning to vet loans. Utilizing AI allows Upstart’s platform to grow smarter and more efficient at processing and analyzing loans over time.
Even though the average Upstart approval has a lower credit score than the traditional loan-vetting process, the delinquency rates between Upstart loans and the traditional process have been similar. The takeaway here is that Upstart can widen the scope of potential customers for lending institutions without necessarily increasing their credit-risk profiles.
Something else worth noting is that Upstart’s vetting process is mostly automated. During the September-ended quarter, 75% of all approved loans were automated, which saves its 83 bank and credit union partners time and money.
Lastly, Upstart’s expansion into new verticals is just getting started. After predominantly focusing on personal loans for years, it’s begun offering its services for auto loan originations and small business loans. The latter two loan-origination markets are significantly larger than personal loans.
Though it could be a rough start to 2023, Upstart’s competitive edges make it a logical go-to for financial institutions in the new year.
Fastly: Implied upside of 195% in 2023
A second beaten-down stock with serious turnaround potential in 2023, at least according to one Wall Street analyst, is edge cloud-computing company Fastly (FSLY 4.51%). If analyst Frank Louthan at Raymond James is correct, shares of Fastly can nearly triple to $25 this year.
Fastly, which is best known as a content-delivery network (CDN), was a big-time winner during the early stages of the COVID-19 pandemic. Since it was tasked with moving data from the edge of the cloud to end users as quickly and securely as possible, the thinking among investors was that a hybrid work environment would drastically increase CDN demand. Since Fastly is a usage-driven company, the needle was, most definitely, pointing higher.
However, the Fastly train derailed in a big way over the past two years. Wider than expected losses and quite a bit of stock-based compensation have failed to wow Wall Street or support a once-lofty valuation that topped $15 billion. But while Fastly is down big, it’s certainly not out.
In particular, many of Fastly’s key metrics continue to impress. Fastly has added 599 total customers since the end of 2020 and has sustained a dollar-based net expansion rate (DBNER) of at least 118% over that time. DBNER provides a way to examine the spending habits of existing customers on a year-over-year basis. DBNER’s range of 118% to 141% over the past seven quarters shows that existing customers are spending between 18% and 41% more on a year-over-year basis.
To add to the above, Fastly’s revenue retention rate in 2020 and 2021 came in at 99.3% and 99.2%, respectively. When the company lands a customer, they tend to stick around (and increase their spending by a double-digit percentage).
Another important catalyst for Fastly is the hiring of Todd Nightingale as CEO. Nightingale was in charge of Cisco Systems‘ cloud and network strategy and development, and will be tasked with leading innovation at Fastly while also being mindful of expenses.
Although a $25 price target might be a bit lofty for Fastly in 2023, it’s not entirely out of the question if the company delivers tangible bottom-line improvements.
CrowdStrike Holdings: Implied upside of 148% in 2023
The third turnaround stock that offers incredible upside in 2023, based on Wall Street’s high-water price target, is cybersecurity stock CrowdStrike Holdings (CRWD 1.39%). Analyst Trevor Walsh of JMP Securities foresees shares of the company rising to $235. This would represent upside of a cool 148% based on where CrowdStrike ended the previous week.
The biggest knock for CrowdStrike is simply its valuation. CrowdStrike’s supercharged revenue growth has afforded it a sizable multiple relative to its sales and earnings. While this multiple was tolerated by investors when interest rates were at historic lows, this is no longer the case with rates rising and the Nasdaq in a bear market.
But CrowdStrike wouldn’t be on this list if it didn’t have a number of tailwinds in its sails. To begin with, it benefits from the highly defensive nature of the cybersecurity industry. No matter how poorly the U.S. economy or stock market performs, businesses of all sizes still need cybersecurity solutions to protect sensitive data from robots and hackers. Evolving into a basic necessity industry should allow CrowdStrike to generate highly predictable cash flow.
CrowdStrike’s cloud-native Falcon security platform offers competitive advantages as well. Falcon oversees trillions of events each week and leans on AI and machine learning to protect end users. Even though it’s not the cheapest end-user security solution available, CrowdStrike has seen its gross retention rate climb above 98%. In short, its premium price has proved well worth it for customers.
Speaking of customers, CrowdStrike has seen both its customer count and add-on sales soar. As I’ve previously pointed out, the company’s customer count has skyrocketed from 450 to more than 21,100 in less than six years. Meanwhile, 60% of its 21,100-plus customers have purchased five or more cloud module subscriptions. That compares to a single-digit percentage that had purchased four or more cloud subscriptions less than six years ago. Add-on sales from high-margin subscriptions is a recipe for CrowdStrike’s adjusted subscription gross margin to approach 80%.
While it could be difficult for CrowdStrike’s share price to get anywhere near $235 in 2023 with the Nasdaq bear market still in full force, ending the year higher certainly seems doable.