Both Lemonade (LMND 1.64%) and SoFi Technologies (SOFI 3.69%) are innovative companies that are looking to disrupt insurance and banking, respectively. But despite having truly game-changing potential, their stocks are down considerably from their all-time highs, even after experiencing huge price run-ups since the beginning of May.
Nonetheless, investors might be thinking about putting capital to work in one of these top fintech stocks. But what business is the better buy? Let's take a closer look.
Lemonade: Blending artificial intelligence with insurance
There hasn't been a hotter topic in the world of business and technology in recent months than artificial intelligence (AI). Investors are moving fast to try and identify stocks that are riding this wave. For what it's worth, Lemonade has long incorporated AI into its operations.
By leveraging data, technology, and AI, Lemonade is able to approve new policyholders in as little as 90 seconds while approving and paying out claims in as little as three minutes. This direct-to-consumer setup is in stark contrast to the traditional insurance model, which relies on an army of salesmen and physical offices scattered throughout the country, slowing things down due to legacy systems.
Lemonade's digital-first model hasn't produced profits yet, but the growth has been outstanding. The business ended the first quarter with 1.9 million customers, up 23% year over year. Revenue was up 115%, and in-force premiums climbed 56% compared to Q1 2022. The fact that all three of these metrics continue rising rapidly, especially when many companies are seeing slowing growth, is a positive sign.
The company offers multiple insurance products, including renters, homeowners, car, pet, and life. The key to Lemonade's strategy is attracting younger consumers that buy more products over time. The business says that less than 4% of its customers have multiple products, but this figure is 60% for the incumbent insurance companies. That presents a huge cross-selling opportunity.
SoFi: A user-friendly digital-only bank
Another popular, albeit more negative, topic that has been on investors' minds in 2023 has been the regional banking crisis. Because the Federal Reserve hiked interest rates at the fastest pace in history in 2022, some financial institutions saw the carrying values of many of the loans they held plummet, prompting regulatory action. SoFi shines brightly amid this turmoil.
For starters, about 98% of SoFi's loan portfolio (as of March 31) consisted of student loans and personal loans, which are much less impacted by changes in interest rates, as opposed to long-dated Treasuries, because they have shorter terms. This allows SoFi to better price its lending products to match the Fed's policies.
Moreover, this digital bank saw its deposits increase from $7.3 billion at the end of 2022 to $10.1 billion at the end of March 31. Operating an online-only model makes it incredibly seamless for customers to move their money to SoFi. But since the company expanded its FDIC insurance capabilities from $250,000 of deposits to $2 million, customers see the safety in moving their money to SoFi.
Like Lemonade, SoFi's growth has been notable. Its customer base, called members, rose 46% year over year in the first quarter. And adjusted net revenue was up 43%. Management is optimistic, as they raised full-year adjusted revenue guidance to an increase of between 27% and 31%.
The winner
To be clear, I'm not particularly excited about owning either of these businesses. That's because while growth has been substantial, both companies are far from generating positive net income. And it's unclear when, or if, this will happen on a consistent basis.
However, if I had to choose one stock to own, I'd go with Lemonade. According to consensus analyst estimates, Lemonade's revenue is expected to rise at a faster clip than SoFi's over the next three years. And at a current price-to-sales multiple of 4.4, Lemonade's shares are priced at a slight discount to SoFi's.
The potential for greater growth, coupled with a cheaper valuation, creates a compelling case for Lemonade. But investors should understand that this is a high-risk play and, therefore, should only invest a small portion of their portfolios into the stock.
