Many investors are preoccupied with soaring inflation. The consumer price index jumped 7.9% in February, marking its fastest growth since January 1982, according to the U.S. Labor Department. Of course, rising prices tend to curtail consumer spending, which negatively impacts corporate revenue growth. As a result, many stocks have sold off sharply in recent months, and the S&P 500 is currently in correction territory.
Despite the macroeconomic environment, some of Wall Street's finest stock pickers see significant near-term upside for certain companies. For instance, Oppenheimer analysts Jason Helfstein has a price target of $45 of Lemonade (LMND 2.12%), implying 143% upside. Similarly, Oppenheimer analyst Brian Schwartz has a price target of $56 on UiPath (PATH 5.63%), implying 131% upside. Clearly, these investing professionals see something they like in both companies, so let's take a closer look.
Here's what you should know.
Image source: Getty Images.
1. Lemonade
Lemonade is a tech-powered insurance company. Its digital-first, mobile-friendly platform aims to delight consumers with easy onboarding, fast claims payments, and cheaper prices. To do that, Lemonade leans on artificial intelligence to interact with clients, underwrite policies, and prevent fraud. For instance, when purchasing insurance and filing claims, consumers interact with intelligent chatbots rather than agents. That reduces friction for Lemonade's policy holders, and it also keeps the company's payroll expenses low. Case in point: Management believes its acquisition costs are ten times lower than those of traditional insurance companies.
Lemonade's core advantage is its digital architecture. Its platform was designed to capture tremendous amounts of data -- 100 times more than traditional insurance providers. The company leans on artificial intelligence to correlate that information with the risk of claims, which theoretically allows Lemonade to underwrite policies more precisely. In other words, compared to traditional insurance providers, Lemonade's claims payments should represent a smaller percentage of premiums (i.e. a lower loss ratio) -- and by keeping extra cash, the company should be able to offer lower prices.
Unfortunately, that didn't pan out last year. Lemonade's loss ratio spiked to 90%, well above the industry average of 82% in recent years. However, investors shouldn't give up yet. Lemonade is still growing its business quickly. In 2021, it reached 1.4 million customers, up 43%, and the average customer spent 25% more. To that end, gross profit jumped 26% to $31.2 million. On a less optimistic note, the company posted negative free cash flow of $154 million over the past year, due in large part to aggressive investments in sales and marketing and research and development.
So can this stock rise 143% in the next 12 months? It's certainly possible. Lemonade has shown that it can be competitive. The company posted a loss ratio of 71% in 2020, and management attributes the recent spike to strong consumer demand for homeowners and pet insurance, both of which are newer lines of business (and therefore have higher loss ratios) than Lemonade's renters insurance. Better yet, the loss ratio in each segment is coming down, and as the company continues to collect more data and hone its AI models, Lemonade could be a disruptive force in the industry over the long term.
Going forward, investors should watch Lemonade's loss ratio. If it drops sharply, and the company manages to accelerate top-line growth and post positive free cash flow in 2022, I think this stock could generate a return of 140% over the next year.
NYSE: PATH
Key Data Points
2. UiPath
UiPath specializes in robotic process automation (RPA), a technology used to automate highly repetitive tasks like moving documents, copying data, and sending templated emails. Its platform also incorporates low-code development tools and several types of artificial intelligence, including computer vision and machine learning. The end results is a software suite that makes it easy to discover processes fit for automation, then build and manage intelligent software robots capable of handling those tasks.
In the past year, UiPath has been recognized as the RPA industry leader by several independent companies, including Gartner, Forrester Research, and the International Data Corporation (IDC). Its broad platform and extensive partner ecosystem have both played roles in its success. With over 400 technology partners, the UiPath marketplace offers more than 1,400 pre-built integrations, allowing clients to easily automate tasks in popular software products like Microsoft 365.
Investors should note that UiPath's IPO took place in April 2021, meaning its financial history as a public company is limited. That being said, the early results are encouraging. UiPath grew its client base 23% to 9,630 in the third quarter, and 1,363 of those clients now spend at least $100,000 on an annual basis, up 52% from the prior year. Fueled by its land-and-expand growth strategy, revenue jumped 50% to $220.8 million, though the company lost $0.23 per diluted share on the bottom line.
Going forward, the bull case for UiPath is straightforward: By automating tedious tasks with AI-powered software bots, human employees can work more productively, which should mean more revenue and fewer expenses for clients. Additionally, as the clear leader in a quickly expanding market -- IDC values the RPA industry at $30 billion by 2024, up from $17 billion in 2020 -- UiPath is well positioned for future growth.
So can the stock rise 131% in the next year? It's possible, but I think UiPath would need to deliver an impressive financial performance in the coming quarters. However, even if that doesn't happen, this stock could still be a rewarding long-term investment.
