Lemonade (LMND 1.64%) and Opendoor (OPEN 3.38%) both tried to shake up mature industries with digital-only platforms. Lemonade streamlined the byzantine process of buying insurance plans with an AI-powered chatbot app. Opendoor's online platform streamlines home sales and purchases by making instant cash offers for homes, repairing those properties, and relisting them for sale.
Both companies initially impressed investors with the disruptive potential of their digital platforms and robust growth rates. As a result, Lemonade and Opendoor both hit their all-time highs during the growth and meme stock rally in early 2021.
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However, both stocks subsequently lost 90% of their value as rising rates cast a harsh light on their slowing growth, ugly losses, and bubbly valuations. Should investors buy either of these out-of-favor stocks as a turnaround play right now?
Why did investors sour on Lemonade's prospects?
Lemonade claims its AI-powered app can insure its users within 90 seconds and process their claims within three minutes, and that simple digital-first approach made it an appealing choice for younger and first-time insurance buyers. Its number of customers grew 56% in 2020, 43% in 2021, 27% in 2022, and 23% year over year to 1.86 million in the first quarter of 2023. That double-digit growth is still impressive, but it's been losing its momentum over the past three years.
That slowdown is worrisome because the bullish thesis is rooted in Lemonade's ability to gain tens of millions of customers and disrupt traditional insurers with its AI tools. But Lemonade is still tiny compared to market leaders like Allstate, which serves about 16 million customers, and State Farm, which has over 85 million in-force policies.
If Lemonade can't scale up its business, it probably can't ever break even since it needs economies of scale to kick in to turn a profit in the crowded insurance market. Lemonade narrowed its net margin from negative 188% in 2021 to negative 116% in 2022, but analysts expect it to keep posting negative margins annually through 2025.
Lemonade still generates most of its revenue from its homeowners and renters plans, but it's quickly added other policies -- including term life, pet health, and auto insurance -- to that mix since its IPO to gain more customers. It believes its acquisition of Metromile last year will accelerate the expansion of Lemonade Auto (which it's already rolled out in five states) and boost its revenue with a higher mix of pricier auto policies.
Lemonade's revenue more than doubled to $257 million in 2022, partly driven by its acquisition of Metromile, but analysts only expect 55% growth in 2023 and 19% growth in 2024. That slowdown suggests Lemonade will struggle to break out of its niche market and meaningfully challenge the market leaders in this difficult macro environment. Its insiders also notably dumped nearly 60 times as many shares as they bought over the past 12 months.
Why did investors close the door on Opendoor?
Opendoor's revenue plunged 46% in 2020 as the pandemic disrupted the housing market. But after the pandemic passed, its revenue soared 211% to $8 billion in 2021 as the pent-up demand for new houses drove a stampede of buyers to the market. It bought up 36,908 homes during the year, which represented a 498% increase from 2020.
Unfortunately, rising interest rates cut short Opendoor's post-pandemic recovery. Its revenue still rose 94% to $15.6 billion in 2022, but its number of purchased homes dipped 5% to 34,962 units. Its year-over-year revenue growth also turned negative in both the fourth quarter of 2022 and first quarter of 2023 as the macro headwinds intensified. Analysts expect its revenue to tumble 49% to $7.9 billion for the full year.
Opendoor is built to thrive in a healthy housing market with low interest rates. But as those two pillars crumbled over the past year, its net loss more than doubled from $662 million in 2021 to $1.35 billion in 2022. That isn't too surprising considering how capital-intensive its business of buying, repairing, and selling properties is, but analysts still expect it to post a narrower loss of $688 million in 2023 as it gradually reins in its spending.
Opendoor doesn't expect the housing market to warm up soon, but it plans to expand its lower-cost partnerships channels (which include home builders, agents, and online real estate platforms like Zillow) to attract more sellers.
Opendoor's insiders only sold slightly more shares than they bought over the past 12 months, which suggests its downside could be limited. However, its growth could remain painfully sluggish until the housing market finally stabilizes.
The better buy: Opendoor
I wouldn't rush to buy either of these speculative stocks right now. But if I had to pick one over the other, I'd stick with Opendoor, because its challenges seem more cyclical than existential. I believe Opendoor's growth will accelerate again once the macro environment improves, but I'm not too confident that Lemonade can scale up its business, narrow its losses, and actually disrupt the insurance market with its AI chatbots and algorithms.
