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2 Tech Stocks That Could Make You Rich

By Trevor Jennewine - Mar 18, 2021 at 7:00AM

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These tech companies are disrupting the status quo -- that could mean big gains for investors.

As time passes and technology changes, some well-established enterprises will fade from relevance as lesser-known start-ups rise in their place. The tricky part is finding those potentially life-changing investments early on.

Fortunately, companies that achieve great success tend to have certain traits in common. For instance, they are often first movers in emerging industries. That could mean developing a new product or tackling an old problem with a novel solution.

Enterprises like Lemonade (LMND -1.82%) and Arista Networks (ANET 1.52%) check that box. Here's why investing in these two tech companies could make you rich.

Man holding digital dollar sign and digital bar graph trending upward.

Image source: Getty Images.

1. Lemonade: AI-powered insurance

Lemonade is a tech company that sells insurance. Though its initial focus was on renters and homeowners policies, it entered the pet insurance and term life insurance markets in 2020, and it plans to expand its portfolio again in 2021.

Lemonade's digital approach to insurance differs dramatically from its rivals. While traditional insurers have agents who sell policies and handle claims, Lemonade automates these processes with AI-powered chatbots. In fact, the company uses artificial intelligence to improve virtually every aspect of its business: Marketing, underwriting, fraud detection, and the customer experience.

So far, the results are encouraging. Lemonade's loss ratio dropped to 71% in 2020, meaning the company paid out $0.71 in claims for every $1 in earned premiums. That's a big improvement from its 161% loss ratio in 2017. More importantly, it puts Lemonade roughly in line with the top 20 property and casualty (P&C) insurance companies, which have an average loss ratio of roughly 72% in recent years.

Likewise, Lemonade's sales and marketing expenses actually decreased 9% in 2020, but its customer base grew 56% and its premium per customer grew 20% during the same time period. In other words, Lemonade's AI-powered marketing is becoming more efficient.

Moreover, the addition of new customers (and the rising premium per customer) have powered impressive growth in gross profit.

Metric

2018

2020

CAGR

Gross profit

$3.1 million

$24.8 million

183%

Data source: Lemonade  SEC filings. CAGR: compound annual growth rate.

But Lemonade has one more trick up its sleeve. The company also purchases reinsurance (insurance for insurance companies) to make its business less volatile. While this strategy cuts into Lemonade's top line, it also stabilizes its gross margin -- in fact, management estimates that Lemonade's gross margin will vary by no more than 3% in 95 out of every 100 years. That type of consistency is impressive in an industry that can literally depend on the weather.

Investors should be aware that Lemonade is much smaller than market-leading rivals like Berkshire Hathaway's group of insurance brands and Allstate. But the insurance industry is enormous, generating over $5 trillion in annual premiums worldwide. That means Lemonade has a massive opportunity, and capturing even a few percentage points of that market would translate into tens of billions of dollars on the top line. Moreover, the company's AI-powered business should give it a long-term advantage over its rivals.

2. Arista Networks: Software-driven networking

Arista provides networking solutions (switches and software) for data centers and enterprise campus environments. Since its inception, the company's software-driven approach to networking has differentiated it from Cisco and Juniper Networks. For example, rather than selling discrete routers like its rivals, Arista's software allows its R-Series switches to double as advanced routing platforms. This reduces cost and complexity for Arista's clients.

Man touching digital dollar sign icon.

Image source: Getty Images.

As part of its enterprise portfolio, Arista launched its 750 series campus switch last November. This new product line offers 400 Gbps (gigabits per second) of total bandwidth -- five times more than the closest competitor -- and helps clients create fast, secure WiFi networks. Like all Arista hardware, these new switches are powered by merchant silicon rather than costly proprietary chips used by rivals.

Arista's decision to use merchant silicon has been a big advantage for two reasons. First, it allows the company to launch new products quickly while still incorporating the latest chip technology. Second, it makes Arista more efficient than its rivals, because the company doesn't spend money to develop chips in-house. Ultimately, Arista can pass those savings on to customers, meaning its products come at a better price-to-performance ratio.

Over the last decade, these advantages have helped Arista take significant market share in the high-speed data center switching market (10 Gbps and above). Meanwhile, Cisco's market share has trended downward, though the company is still the leader.

Market Share (in dollars)

2012

First Half 2020

Arista

3.5%

16.3%

Cisco

78.1%

43.7%

Data source: Crehan Research Report.

In the coming years, the proliferation of connected devices (think Internet of Things) and computer-intensive applications (think artificial intelligence) will place more demand on data centers. That will create a need for more powerful networking solutions. As the leading provider of 100 Gbps and 400 Gbps switches, Arista is well-positioned to grow its top line quickly and continue taking market share.

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Stocks Mentioned

Lemonade, Inc. Stock Quote
Lemonade, Inc.
LMND
$21.07 (-1.82%) $0.39
Cisco Systems, Inc. Stock Quote
Cisco Systems, Inc.
CSCO
$42.94 (2.92%) $1.22
Juniper Networks, Inc. Stock Quote
Juniper Networks, Inc.
JNPR
$28.87 (0.24%) $0.07
Arista Networks, Inc. Stock Quote
Arista Networks, Inc.
ANET
$102.64 (1.52%) $1.54

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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