For those investors thinking of putting money to work in the financial sector, it might be a good idea to consider taking a closer look at either Lemonade (LMND 1.44%) or SoFi Technologies (SOFI -0.13%). These companies have posted tremendous growth in recent years, and they each have attractive traits investors might find compelling.
Even more notable is that both of these innovative fintech stocks are significantly off their all-time highs, peaks that were hit around the same time in early 2021. So which business is the better buy?
The case for Lemonade
With all the hype surrounding artificial intelligence (AI) in recent months, it's refreshing to see Lemonade offer a true use case by integrating this technology into its disruptive platform. By leaning heavily on data, Lemonade is a vertically integrated insurance provider that allows customers to easily sign up for a policy in as little as 90 seconds, with many claims paid out in as little as three minutes.
The result is a much better direct-to-consumer user experience in what is an outdated industry. It is estimated that 93% of homeowners' insurance policies are sold through brokers, a setup that Lemonade's automation is upending. The world is becoming more digital, making the insurance market ripe for these types of tech-focused improvements.
Lemonade's customer base has roughly tripled from 643,000 in 2019 to 1.8 million in 2022. Even more eye-opening is the fact that 22% of the company's first-time policy holders for renter's insurance in the last 12 months are below the age of 35, a higher proportion than any of its competition. This means that Lemonade can expand its business by cross-selling different products as its customers get older and hit major life milestones, like buying a car or a house. Speaking of growth, revenue skyrocketed 100% in 2022, with management expecting a gain of 47% this year at the midpoint.
As of this writing, Lemonade shares are down 93% from their January 2021 all-time high, and they now trade at a price-to-sales (P/S) multiple of 3.2, close to the cheapest the stock has ever been. This could be very enticing to investors.
The case for SoFi
Like Lemonade, SoFi is also built on the premise of using technology effectively to improve the customer experience. By offering a wide range of financial products, like student loan refinancing, credit cards, investing solutions, and checking accounts, among others, the company aims to be a comprehensive and fully digital banking offering for its 5.2 million customers (up 51% year over year), or what SoFi calls members. It also partners with third-party providers to offer some of the same insurance products that Lemonade does.
At its core, SoFi is a bank, albeit a truly digital one. And this might not sit well with some investors given the issues going on with the broader industry right now. However, SoFi's advantage is that only $642 million out of $7.3 billion in customer deposits are uninsured. And the vast majority of the company's loan book consists of student loans or personal loans, whose shorter duration makes them less vulnerable to value deterioration because of rapidly rising interest rates. In fact, net interest income surged 132% last year. Plus, the company is now offering Federal Deposit Insurance Corp. protection of up to $2 million on checking and savings deposits for its customers, much higher than the standard $250,000, which could boost the membership count.
SoFi's stock price has declined 78% since peaking in February 2021, despite being up 26% so far in 2023. It now sells at a P/S multiple of 3.1, providing investors with a rare opportunity to buy the beaten-down growth stock.
The winner
While both Lemonade and SoFi have their fair share of positive characteristics -- the most notable being rapid growth thanks to the smart use of technology to provide a superior user experience -- one critical factor that I really don't like is how unprofitable these businesses are. Lemonade posted a net loss of $297.8 million in 2022, while SoFi lost $320.4 million last year. Neither of these companies are showing signs of turning these losses into net income anytime soon.
As a result, it's hard for me to recommend buying either of these stocks right now. During what is shaping up to be an extremely uncertain economic environment, investors are better off passing on these companies, despite how attractive their valuations might look.
However, for growth-oriented investors who favor innovative and disruptive companies at the expense of positive net income, I give SoFi the edge here thanks to its proven balance sheet strength during this banking crisis.
