2 Growth Stocks Shaping the Future of Technology

Technological innovations tend to set the bar for human productivity while also creating tremendous amounts of wealth. For instance, the invention of the steam engine powered the first industrial revolution in the 1700s. And the electrification of industry sparked the second industrial revolution in the 1800s, leading to the widespread adoption of mechanized manufacturing.

More recently, semiconductors and personal computers gave rise to the third industrial revolution, often called the digital revolution. And today, we're living through the fourth industrial revolution, a time period characterized by mobile connectivity, artificial intelligence, and (presumably) technologies we can't even imagine yet.

With that in mind, here are two growth stocks that are shaping the future of technology.

Image source: Getty Images.

1. Lemonade

Lemonade (LMND 8.23%) is a tech company that's disrupting the insurance industry. While traditional insurance providers employ actuaries to estimate risk, agents to sell policies, and adjusters to handle claims, Lemonade cuts back on human inefficiencies with artificial intelligence.

Specifically, its digital first platform uses AI chatbots to engage customers, allowing Lemonade to price policies in just two minutes and pay claims in as little as three seconds. This results in a delightful customer experience, while also keeping the company's payroll expenses low.

More importantly, Lemonade's platform was designed to capture far more data than traditional systems. By blending those signals with artificial intelligence, the company aims to quantify risk more precisely. In turn, that should keep its loss ratio (i.e. the percentage of premiums paid out in claims) below the industry average, allowing Lemonade to undercut its rivals on price.

This creates a network effect. As more consumers  buy insurance through Lemonade, the company will collect more data, sharpening its ability to predict risk. In turn, that should translate into lower prices, making Lemonade a more attractive option to all consumers

Of course, Lemonade hasn't been around long enough to know whether this theoretical advantage actually holds against industry titans like State Farm. But the early indicators are promising. The company posted a gross loss ratio of 74% in Q2 2021, roughly eight percentage points lower than the industry average in recent years. And Lemonade has grown customers and gross profit at an impressive pace.

Source: Lemonade SEC filings. TTM = trailing-12-months. CAGR = compound annual growth rate.

Lemonade recently announced that it would soon be launching an auto insurance product, Lemonade Car. This adds $300 billion to its addressable market in the U.S., bringing the total to over $400 billion. That move should have investors excited. Management estimates that current customers spend $1 billion on car insurance each year, and now Lemonade can provide that service.

Here's the big picture: Lemonade uses modern tools like big data and artificial intelligence in a novel setting. In that way, the company is not only shaping the future of the insurance industry, but by exploring new use cases for AI, it's also shaping the future of technology. And if Lemonade can continue to execute on its massive market opportunity, this growth stock could be a very rewarding long-term investment.

2. Square

Traditionally, small- and medium-sized businesses (SMBs) have turned to banks and independent sales organizations for merchant services. But these providers often require long-term contracts, and they typically bundle hardware and software from different vendors, which can lead to compatibility issues.

In other words, finding a merchant services provider can be difficult, especially for SMBs that lack robust IT teams. That's what makes Square (SQ 5.04%) so compelling. There are no contracts, and its self-service platform offers all the hardware, software, and services sellers need to run their businesses. This includes solutions for everything from payment processing and employee payroll to marketing and customer loyalty. In short, Square democratizes commerce.

The company also provides a range of financial tools to consumers. The Cash App combines banking and brokerage services by allowing users to deposit money directly, then send, spend, and invest those funds. Consumers can also use the platform to file taxes. And once Square's recently announced acquisition of Afterpay is complete, the mobile app will become a discovery tool for merchants offering "buy now, pay later" at checkout, better connecting Square's Seller and Cash App ecosystems.

In both cases, Square offers a simple and convenient solution to its clients, helping the company capitalize on two major trends: e-commerce and digital payments.

Source. Ycharts. TTM = trailing-12-months. CAGR = compound annual growth rate.

In July, Square acquired workplace messaging platform Crew for an undisclosed amount. This will strengthen its team management tools, which currently help clients schedule employees and track attendance. While this merger is unlikely to move the needle on its own, Square's decision to integrate messaging features into its platform positions the company to serve bigger businesses.

That's important because Square has already seen increased demand from mid-market sellers (i.e. those generating over $500,000 in sales each year), primarily due to its custom point-of-sale software for retailers and restaurants. In fact, larger sellers accounted for 35% of gross payment volume in Q2 2021, up from 26% in Q2 2019. That trend bodes well for Square and its shareholders.