Both Lemonade (LMND -1.68%) and Upstart (UPST -1.37%) made their stock market debuts in 2020. And although shares in these two businesses did well early on, it's been a completely different story in the past couple of years. Lemonade is down about 77% since going public, while Upstart's stock is down a whopping 94% from its all-time high. That's not what shareholders were hoping for.
But there's no doubt that these are innovative companies with the potential for outsized long-term returns. So, which of these fintech stocks is the better buy right now? Let's take a closer look at the bullish cases for both before coming to a conclusion.
The case for Lemonade
Lemonade is trying to change the game of insurance by using artificial intelligence (AI) to better serve customers. The company uses data and machine-learning models to constantly improve all aspects of its operations. In fact, 98% of Lemonade's policies are not sold by a human, with the goal that this automation will reduce costs. Right now, Lemonade offers renters insurance, homeowners insurance, car insurance, pet insurance, and life insurance, which combined create a massive market opportunity.
The insurance industry is one of the oldest, so clearly it has been long overdue for innovation. That bodes well for Lemonade's prospects. In fact, growth has been outstanding. Between 2019 and 2022, customers soared 181%, revenue jumped 281%, and in-force premiums were up 204%. And based on the company's 2023 first-quarter financials, the momentum is still strong.
Integrating technology into the mix and going direct-to-consumer is why Lemonade has a Net Promoter Score that rivals Apple and Tesla. Being a Lemonade policyholder is simply a much better user experience compared to the traditional brick-and-mortar model that relies on sales agents. Prospective customers can sign up for a policy in as little as 90 seconds, while customers can have a claim approved and paid out within three minutes.
Besides offering a tech-enabled platform that is easy to use, which has done a good job at attracting a younger demographic, Lemonade is also focused on giving back. After earning a flat fee to help cover potential claims, the business lets policyholders choose what charities they'd like any unused premiums to go to. Shareholders can appreciate that Lemonade wants to take care of all stakeholders.
The case for Upstart
Like Lemonade, Upstart is a disruptive fintech that utilizes AI in its business model. Upstart offers a lending platform that looks at 1,600 different variables to come to credit-approval decisions about potential borrowers. As of May 9, Upstart had 99 different lending partners using its tool. The premise is that Upstart can allow its partners to approve more customers while keeping default rates in check. It's supposed to be a win-win-win for all three parties -- Upstart, banks, and borrowers.
Currently, the business operates in the markets for personal loans and auto loan refinances. But with ambitions to enter the mortgage market (valued at $2.7 trillion) and the small business loan market (valued at $644 billion), the opportunity is enormous. Unsurprisingly, growth has been impressive. Between 2019 and 2022, revenue skyrocketed 413%. Getting more banking partners using Upstart's technology is critical for the company to keep up these monster gains.
It's also worth pointing out that Upstart doesn't try to hold loans on its own balance sheet. It just provides the tech platform that enables banks to do what they do best, which is to approve borrowers and service loans. However, the amount of loans that Upstart holds has soared 64% year over year to $982 million as of March 31, as a direct result of challenging credit markets. But the hope is that when macro conditions improve, Upstart can sell those loans to institutional investors and not take on credit risk itself, freeing up capital and reducing cyclicality.
Investors can like both
Lemonade and Upstart certainly each have their own investment merits, as I've outlined above. These companies have tremendous growth potential thanks to their disruptive business models, and they were already utilizing AI before it became hot. Moreover, shares of each company are down a lot from their peaks.
Consequently, I don't see a valid argument against owning both stocks, particularly for investors who truly have a long-term mindset.
