Ten years from now, we might have flying cars or flying people. At the very least, many more people are probably going to own electric vehicles and turn them on with voice commands. So if you're buying stocks today, keep in mind that companies might be very different in a decade. To stay ahead of the curve, you should consider companies that are working on products that will be highly relevant in 10 years. My picks for stocks with explosive growth potential 10 years down the line are Lemonade (LMND 8.17%) and Upstart Holdings (UPST 8.75%).
1. Lemonade: Insurance for the future
Artificial intelligence (AI)-based insurance company Lemonade has captured the attention of investors since it burst onto the public markets a year and a half ago, but it's not necessarily positive attention. Its stock price plummeted 65% in 2021, trading below its first-day closing price following its IPO. Investor confidence seems so dismal that Lemonade stock has become one of the most shorted on the markets.
But those sentiments aren't necessarily warranted, and the low price creates a great long-term opportunity for investors who see Lemonade's explosive potential.
Lemonade offers digital insurance policies backed by AI and machine learning, and much of the interactions happen without human contact. That makes for a faster and less-cumbersome experience, and down the road, it should be a less expensive one as well.
Customers are flocking to Lemonade's products, and growth has been phenomenal. In-force premium is the company's prime growth metric -- it measures the average annual total premium (average premium per customer multiplied by customer count). It increased 84% in the third quarter, its lowest increase since Lemonade went public. Revenue hasn't grown quite as quickly, and that's partly due to the changing nature of the company's agreements with third-party reinsurers, although it doubled in Q3.
Customers have grown to more than 1.4 million, and the premium per customer has been growing each quarter as well. That's because the company's strategy of gaining customers for one policy and keeping them loyal as their insurance needs increase has been working. The average premium per customer was $254 in Q3, but bundled customers' average was nearly three times that number. Lemonade now offers renters, homeowners, pet, term life, and car insurance. Lemonade Car, its most recent product and biggest market, launched a few weeks ago and was panned by the stock market. Lemonade acquired digital auto insurance competitor Metromile at the same time as the announcement, and the market didn't react kindly. The deal tacked on a $37 million loss onto Lemonade's huge $66 million loss in Q3, which already doubled year over year.
On top of the loss pileup, Lemonade's loss ratio hasn't been steadily decreasing. It exceeded 100% in the 2021 first quarter. While it's since declined to a more reasonable 77% in Q3, the company is still struggling to keep it down as it adds new products, which typically have a higher loss ratio.
However, these issues appear to be temporary and part of the pain of growing. It could always get worse, but most of the operation looks solid, and 2022 might be the year it starts to turn around. In 10 years, you might be very happy that you bought this explosive stock at a low price and held on.
2. Upstart: Helping banks make better lending decisions
Upstart is also based on AI, which is powering many of the tech companies of the future. The AI platform runs potential borrowers' information through thousands of data points to determine how much of a credit risk they are to the banks. This results in more borrowers getting approved instantly without increasing the bank's risk. This powerful system is leading to spectacular performance for the company, which opened up its market this year by acquiring Prodigy software and targeting the auto retail industry. It has plans to tackle the mortgage industry in 2022.
Upstart posted stellar results in Q3, beating estimates with a 250% year-over-year increase in revenue and more than tripling net income. But investors sent the stock down after the earnings report, partly because that kind of growth was still a huge deceleration from the more than 1,000% increase in the second quarter. Management is expecting a further slowdown in the fourth quarter to a 200% increase at the midpoint. While that's still nothing to sneeze at, it doesn't necessarily support Upstart's high valuation of 153 times trailing 12-month earnings as of this writing.
However, Upstart's market, including personal loans, auto loans, and mortgages, exceeds $5 trillion, and it's capturing more of it each quarter. It had only 10 banking partners when it went public just over a year ago, with one accounting for the majority of its business. It now has 31 banking partners and less concentration. It's also added 13 million data cells to its machine learning since IPO for a total of 28 million, making each decision even more accurate.
It might look a little scary to see Upstart's stock diving more than 60% from its highs less than three months ago, but there's a whole lot to look forward to for this company in the next 10 years.