The meme stock craze of 2020 and 2021 was certainly a wild situation, and to be fair, many of the stocks that spiked aren't worth buying. Some have struggling businesses or terrible balance sheets, and aren't worth a second look, even after their share prices have come down to Earth.
On the other hand, there are some great businesses that for one reason or another got caught up in the meme stock frenzy. Here are two in particular that have plunged considerably from the highs but have massive market opportunities and strong momentum in their businesses.
A market in desperate need of disruption
There are few industries more in need of disruption than insurance. The process for buying insurance can be clunky at best, and the claims process can be an absolute nightmare. With nearly 1.6 million customers and tremendous reviews, Lemonade (LMND 0.83%) is showing the world there is a better way.
One of the big reasons Lemonade's stock is down by 88% from its $188 meme stock peak share price is that profitability remains elusive. In the second quarter of 2022, Lemonade posted a net loss of about $68 million on just $50 million in revenue, and its loss ratio (percent of premiums paid out for claims) is 86% -- far greater than the 75% target management has set.
Having said all that, Lemonade's business continues to grow, and management is convinced that losses will peak in the third quarter and profitability will be achieved without any need for further capital raises. To put it mildly, if Lemonade can accomplish this, it could be a big win for patient shareholders.
Massive market opportunities if its AI-powered lending model works
Financial technology disruptor Upstart (UPST -1.97%) got caught in the meme stock frenzy as well, having just gone public in a highly anticipated December 2020 IPO. The stock peaked in October 2021 at more than 20 times its IPO price but has since dropped more than 94%.
To be sure, there are some good reasons for the decline. For one thing, Upstart's innovative credit model hasn't been tested in a bad economy yet, and with recession fears looming, investors are a bit more cautious. And we're also seeing clear signs of a slowdown in consumer spending and borrowing activity.
Having said that, Upstart still has a massive opportunity ahead of it. The company is just ramping up its presence in the $770 billion auto lending market, has just started to dip its toes in the $644 billion business lending industry, and is planning to expand into the $4.2 trillion mortgage market next year. Given the remarkable success Upstart has already achieved in the much smaller personal loan industry, it's fair to say that the company could have tremendous growth potential if its lending model is proven to be effective in all economic climates.
These are still relatively speculative stocks
I own both of these stocks in my personal portfolio. I bought Lemonade well before the meme stock craze and have been accumulating a position in Upstart as its share price has come down.
Having said that, it's important to realize that although their valuations certainly make more sense than they did in early 2021, both of these stocks are still quite speculative. There's a tremendous amount of execution risk when it comes to disrupting large markets. I own both, but my position sizes are relatively small, and I expect quite a roller coaster ride as these growth stories play out.
