The fintech industry continues to bring change to an industry ripe for disruption. Its offerings have forced the finance industry to rethink costly and relatively inefficient processes that have existed for decades. Two of these processes are insurance sales and banking.
While these fintech stocks face significant risks, Lemonade (LMND 1.44%) and SoFi Technologies (SOFI -0.13%) could change their respective industries and drive outsized gains for investors in the process. Let's find out a bit more about these two fintech stocks that have the potential to make you a fortune.
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1. Lemonade is trying to refresh the insurance industry
According to the Insurance Information Institute, the industry collected almost $1.3 trillion in premiums in 2020. Amid these increases, innovation has had relatively little effect on this industry that continues to rely on relatively expensive, full-commission agents.
Image source: Insurance Information Institute.
In contrast, Lemonade has developed a model to evaluate prospective customers using AI and behavioral economics. When it collects revenue, the company takes a fee and allocates the rest to industry partners that actually cover any potential claims. If some funds remain, Lemonade donates them to a charity chosen by the customer.
It sells renters, homeowners, pet, and life insurance. Lemonade also recently began selling auto insurance, and with its upcoming purchase of Metromile, it will sell car insurance based on the number of miles driven. Such an approach could draw customers away from auto insurers.
Lemonade is young and it is still trying to prove to the market that it can execute on its alternative ideas for insurance evaluation. Its AI-fueled business is getting squeezed at the moment. In the fourth quarter, its gross loss ratio, or percent of premiums paid in claims, rose to 96%, up from 73% one year ago. This should concern investors since that number rose due to the insurer underestimating claim amounts.
Lemonade hired Sean Burgess away from USAA to serve as chief claims officer to address such issues. But considerable doubts will likely surround the stock if it cannot reduce the gross loss ratio.
Moreover, Lemonade generated over $128 million in revenue in 2021, a 36% increase year over year. But with expenses rising 68% over that time, losses almost doubled to $241 million.
The company anticipates revenue between $202 million and $205 million in 2022, a 58% increase at the midpoint. Such faster growth and the drop in the stock price of over 80% since last June could attract investors back. Also, the price-to-sales (P/S) ratio of 11 is near a record low.
Given the high cost of its claims, Lemonade is not for the risk-averse. Nonetheless, the huge discount in the stock should lead to massive gains if it fundamentally changes an industry ripe for transformation.
2. The power of the SoFi ecosystem
SoFi has emerged from a special-purpose acquisition company (SPAC) merger last year to become one of the more intriguing public businesses in fintech. It got its start by refinancing student loans, a segment that made up about 34% of its loan portfolio in 2021. It later ventured into personal loans, which has become its biggest segment at 43% of outstanding loans. Home mortgages make up the remainder of its loan volume. Additionally, it purchased Galileo in 2020, giving it an API and payments platform that turned it into more of a fintech.
However, outside of its SPAC merger, it may have scored its biggest coup by buying Golden Pacific Bank. This deal gave SoFi a bank charter, meaning that it can offer checking accounts, savings accounts, and loans without a partner. These offerings have made SoFi an all-encompassing finance ecosystem for individuals, similar to what Block's Square ecosystem provides to business customers.
Despite SoFi's potential, it's a business with significant risks right now. Its 2021 revenue of $985 million grew 74% year over year. But the company's net loss in 2021 came in at $484 million, 116% higher than in 2020. Losses would have grown by a more modest 47% were it not for a $104 million tax benefit in 2020. Nonetheless, SoFi's growth continues to spawn increasing losses.
Also, in April, SoFi reduced its full-year revenue guidance by $100 million, taking it to $1.47 billion. This assumes the Biden administration's moratorium on student loan payments will not end this year, reducing SoFi's revenue.
Since the SPAC merger on June 1, SoFi's challenges and the broader sell-off in tech stocks have led to SoFi's stock price dropping by over 70% from its high. This takes the P/S ratio to 5, near record lows. However, with its ability to accommodate banking, loan, and fintech needs under one ecosystem, more investors may want to consider overlooking the risks and open positions.
