Over the last two years, the U.S. economy has been flooded with stimulus dollars from the government, combined with record-low interest rates from the Federal Reserve. The measures were necessary to prevent the pandemic from causing an economic catastrophe.
But as the vaccination rollout picked up steam, society began to reopen, and economic activity gradually returned to normal. Suddenly, businesses are dealing with shortages of goods and services as cash-loaded consumers have rushed out to spend money, while supply chains have been slow to catch up with the demand.
Now, the Federal Reserve faces the onerous task of taming inflation, which is at the highest level in 40 years. It has aggressively raised interest rates already, including a 75 basis point hike in June. The policy shift has taken the air out of high-flying technology stocks as investors re-price their growth expectations.
Here are two of the hardest-hit stocks that will also have significant long-term upside potential once market conditions return to a more neutral state.
1. Snap: Down 85%
Any stock that falls 85% or more from its all-time high carries inherent risks, but with the Nasdaq-100 technology index now trading in a bear market, negative investor sentiment could be leading to an overreaction on the downside in some cases. Snap (SNAP 4.71%), the parent company of popular social media platform SnapChat, might be one example.
The platform had 332 million daily active users as of the first quarter of 2022, but it's the future that should capture investors' attention. The metaverse, which describes a collection of virtual worlds, could completely change the way people interact socially and professionally. Snap is working on an augmented-reality version of this technology, which will use its Spectacles glasses to weave digital experiences into the user's real-world surroundings.
The approach differs from traditional virtual-reality iterations, which fully immerse the user inside the digital realm using a headset. But in any case, the metaverse industry is set for a growth boom that could take its value to $30 trillion over the next decade, according to some estimates.
Snap stock now trades at a price-to-sales (P/S) multiple of 5 based on its 2021 revenue of $4.1 billion. That's quite modest for a company that has grown that revenue figure tenfold from just $404 million in 2016.
Snap's key hurdle is profitability, though it is improving. On an adjusted basis, which excludes costs like stock-based compensation, the company is actually making money. Snap had $774 million in adjusted net income in 2021, or $0.50 per share, and analysts expect similar results in 2022 and 2023.
But if the company continues to grow revenue at a compound annual rate of 59%, it will inevitably reach a level of scale that results in true profitability based on generally accepted accounting principles. With the stock down so heavily and the metaverse opportunity on the horizon, there's a good argument for building a position in Snap now, ahead of that point.
2. Lemonade: Down 89%
Any customer who has dealt with a large insurance company probably knows the experience leaves room for improvement, especially when it comes to making a claim, which can be a slow and painful process. Up-and-coming insurer Lemonade (LMND -1.93%) is using advanced technologies like artificial intelligence (AI) to eliminate some of these difficulties, and the company is growing incredibly quickly.
The company's AI bot, Maya, handles customer interactions to write quotes and pay claims in not days or weeks, but minutes. Lemonade operates in five categories: homeowners, renters, pet, life, and auto, which is its newest addition. Car insurance offers the most promise, given the market will have an estimated value of $316 billion in the U.S. during 2022, with approximately 198 million policy-holding drivers.
Considering Lemonade has just 1.5 million customers right now, it opens the way to an ocean of opportunity. And since that figure has grown by a robust 37% in the past 12 months, it suggests the move into this new market is already bearing fruit. It's particularly telling that Lemonade's in-force premium per customer jumped 22% year over year in the first quarter, to $279, thanks to more customers buying policies across more than one category.
Lemonade has suffered from heavy net losses that have grown larger as the company has expanded its operations. In the last 12 months, it has posted a net loss of $267 million. Entering large, new markets is a costly exercise and it can take time to achieve scale, but for the patient investor, the beaten-down stock price might be an opportunity to grab a piece of the future of the insurance industry at a heavy discount right now.
After all, the majority of the company's customers are migrating to Lemonade from its much larger competitors. And as of the first quarter, its in-force premium topped $419 million, which was a 66% jump from the same period last year. It's a rapid growth rate, but it might still be a couple of years before Lemonade achieves scale and reverses its losses. The company does have over $1 billion in cash, equivalents, and investments on its balance sheet, though, so it has a sufficient runway to work through the challenge.
