The Nasdaq-100 technology index has declined by 31% in 2022, and that's even after spending the last two weeks staging a spirited recovery. While it has been a painful time for many investors with tech-focused stock portfolios, the silver lining is that this environment presents several opportunities to buy stock in quality companies at a discount.
A panel of Motley Fool contributors has identified three stocks that have suffered heavy losses since hitting their all-time highs last year, but that also hold significant long-term potential. They are Lemonade (LMND -5.31%), Adyen (ADYE.Y -2.61%), and Upstart Holdings (UPST -3.76%). Here's why investors might want to consider building positions in each of them.
Artificially intelligent insurance at an 87% discount
Anthony Di Pizio (Lemonade): The insurance industry is dominated by large, entrenched companies that take a conservative approach toward innovation. In today's world where consumers are increasingly accustomed to immediate transactions, making claims with traditional insurance providers can be a source of frustration given the lengthy period of time it can take to receive a payout.
Insurance provider Lemonade is using artificial intelligence (AI) to revamp how insurance is sold, how claims are processed, and how it prices premiums. It's operating in five insurance categories (with more to come): Homeowners, renters, life, pet, and car insurance.
Lemonade's AI-powered online bot, Maya, can provide an estimate to a new customer in 90 seconds, and pay claims to existing customers in as little as three minutes. Behind the scenes, the company recently unleashed its new Lifetime Value 6 (LTV6) AI model, which can help predict the likelihood of a Lemonade customer buying multiple policies, the likelihood of them switching insurers, and even the chance they'll make a claim.
With that information, Lemonade can determine the customer's lifetime value and assign an appropriate premium. But LTV6 goes even further because it's able to identify markets where Lemonade is underperforming and overperforming, so it can invest less in the former and focus more on the latter, resulting in increased revenue and fewer claims overall.
The result of Lemonade's innovative approach has been an influx of customers. In the recent second quarter of 2022, the company had about 1.58 million of them, which was a 31% jump year over year. Lemonade is also earning a record-high $290 per customer thanks to successful cross-selling and upselling campaigns, which accounted for 36% of all sales in the quarter.
It culminated in an in-force premium total of $457 million, growing 54% and reaching an all-time high. Lemonade might be the future of insurance, and despite some probable growing pains over the next couple of years, management says the company can reach profitability with the cash it has on hand. That slightly de-risks Lemonade stock as an investment, and since it's down 87% from its all-time high, this might be a great opportunity to get involved.
A premium business down 56% from all-time highs
Jamie Louko (Adyen): Inflation is on the rise around the world, and that hurts many stocks across multiple industries. Inflation in the European Union is almost 11%, while the U.S. has inflation above 8%. Many investors believe that a worsening economy will result in lower consumer spending activity. and this is a big part of why payments processor Adyen's stock price is down about 56% from its all-time high.
But this belief doesn't seem to sync with Adyen's performance. Despite the uncertain macro environment in the U.S. and Europe, Adyen continues to see strong adoption of its services. Processed volume jumped 60% versus the year-ago period to 346 billion euros in the first half of 2022, which helped revenue soar 37% to 608.5 million euros. The global economy might be in a precarious position now, but Adyen doesn't seem to see any indication of that.
One reason the company might have such resilience is that it continues to attract new customers. Since the company reported earnings in August, Adyen announced four new partnerships with companies across the world to process their digital payments.
On the surface, Adyen stock doesn't look cheap. It trades at almost 47 times enterprise value to EBITDA, while rivals like PayPal Holdings only trade at 25.5 times. What you're getting for this premium valuation, however, is a higher-quality business. Not only is Adyen growing revenue faster than PayPal -- revenue only increased 9% year over year in Q2 for PayPal -- but you're also getting a company with a higher profit margin and more cash on the balance sheet to withstand a rough period if one comes soon.
Don't let its valuation scare you: This company is a super stock worth owning for the long haul.
A disruptive fintech company down 94% from its all-time high
Trevor Jennewine (Upstart Holdings): After several quarters of triple-digit percentage revenue growth, Upstart hit a wall in the second quarter, as banks tightened lending policies in response to high inflation and rising interest rates. Revenue growth decelerated to 18% and the company posted a loss under generally accepted accounting principles (GAAP) of $30 million, down from a profit of $37 million in the prior year.
Weak guidance was the final straw for many shareholders. As confidence in the company vanished, Upstart saw its share price plunge more than 90%, and that implosion erased about $30 billion in wealth. Of course, losses of that magnitude are downright terrifying, and they often signal a material weakness in the underlying business. But in this case, investors still have a reason to be bullish: Upstart brings a disruptive business model to the multitrillion-dollar lending industry.
Currently, most banks rely on Fair Isaac's FICO scores when assessing the creditworthiness of potential borrowers, but even the more sophisticated FICO-based models only consider about 30 variables. That means banks make important lending decisions with limited data, and that inevitably leads to errors. Some applicants are incorrectly rejected and others are mistakenly approved, both of which hurt profitability for the bank.
Upstart aims to make lending more efficient with big data and artificial intelligence. Its platform captures more than 1,500 data points per borrower, and it correlates those data points (using AI) with past repayment events to precisely quantify risk. In fact, Upstart says its AI models provide "five times more precision than FICO in terms of separating low-risk borrowers from high-risk ones."
Of course, bears will argue that Upstart is in uncharted water, as its AI models have never been tested during a credit cycle downturn. That is true, and it makes this stock risky. If the macroeconomic environment continues to worsen, banks may fund even fewer loans. That said, Upstart has demonstrated its ability to assess risk better than FICO-based models during high periods in the credit cycle, and if the company can demonstrate its ability to outperform FICO-based models during the current downturn, the stock could skyrocket once the economic headwinds ease.
Shares currently trade at two times sales -- just off the all-time low of 1.8 times sales -- and that creates a buying opportunity for patient, risk-tolerant investors.