The U.S. economy has proven quite resilient despite the Federal Reserve raising benchmark interest rates to the highest level in 22 years. The U.S. economy reported a 2.4% year-over-year growth rate in the April-to-June quarter.
However, high interest rates seem to have now started to slow the labor market, with the unemployment rate jumping from 3.5% in July 2023 to 3.8% in August 2023. By one measure, the CME FedWatch Tool, there is a 91% chance that the Fed will keep interest rates steady in September. This bodes well for U.S. equities.
In such a macroeconomic environment, if you are on the hunt for high-quality stocks that have seen a dramatic fall from their all-time highs, here's a look at two such companies.
1. Sea Limited
Once a darling of the U.S. stock market, shares of Singapore-based tech conglomerate Sea Limited (SE 0.05%) are down by nearly 89% from an all-time high in October 2021. The downfall has been primarily due to the lackluster performance of its digital entertainment arm, Garena.
Sea's shares tumbled by nearly 29% after the company missed the consensus revenue estimates in its recent second-quarter earnings results. The digital entertainment business saw revenue drop by almost 41% year-over-year to $529 million. However, this was partly offset by the performance of the company's e-commerce and financial services segments, which posted year-over-year revenue growth of 21% and 53%, respectively, in the second quarter.
The company's management has also succeeded in pivoting to profitability in a matter of a few quarters. In fact, Sea has been profitable in all of its business segments in the second quarter.
In February 2022, India banned Free Fire, one of Sea's most popular games, on concerns of national security -- triggering almost a 9% year-over-year decline in revenue for the digital entertainment segment in 2022. However, things may again be on the path to recovery, even for the digital entertainment business.
Sea is gearing up to relaunch the local version of Free Fire in India, giving it access to 1.4 billion people. Free Fire also reported improved user engagement and retention, as evidenced by the quarter-on-quarter increase in bookings for the game in the second quarter -- the first time in the past seven quarters.
With operational discipline in place, Sea is again prioritizing growth, especially for its e-commerce business, Shopee. To avoid losing market share to ByteDance's TikTok, the company is investing in livestreaming and short-form video content features, which have driven higher participation from all stakeholders on the Shopee platform.
The company also plans to invest in free shipping in a bid to capture market share. Finally, Sea is investing in improving the efficiency of its logistics operations as well as expanding its network across markets. While these investments may drive long-term growth, Sea may have to sacrifice some profits in the short run.
Sea is currently trading at just 1.8 times sales, very close to historical lows. Coupled with Sea's long-term focus on growth, the management's capability to reach profitability in a few quarters, and the digital entertainment business's future prospects, Sea may prove to be an attractive pick now.
2. Lemonade
Since the start of August 2023, Lemonade (LMND 1.64%), an insurance tech firm, has seen its shares plummet by almost 38%. This sharp decline is attributed to the company's higher-than-anticipated losses in its second quarter, which were primarily a result of catastrophic storms.
From its all-time-high closing price of $183.26 in January 2021, the stock is now down by a staggering 92%. However, while the company is riddled with several short-term challenges, the long-term growth story is still intact.
Lemonade stands out from legacy insurers by harnessing data, machine learning, artificial intelligence, and behavioral economics to streamline tasks such as signing up customers for policies, policy pricing, claim approval, and settlement in a matter of a few minutes without the need for any human interference.
A cornerstone of Lemonade's strategy is its focus on a younger, tech-savvy demographic, onboarding them early and then retaining them as lifelong customers by cross-selling and upselling policies. The company is seeing significant success in expanding its customer base and fostering customer loyalty. In the second quarter, Lemonade posted a 21% year-over-year jump in customer count to 1.9 million, while premiums per customer rose 24% year over year to $360.
To further reduce customer acquisition costs, Lemonade has introduced a "synthetic agent" program wherein it has partnered with venture capital firm General Catalyst. According to the deal, starting July 1, General Catalyst will cover up to 80% of Lemonade's customer acquisition costs in exchange for a 16% commission on the premiums from those new customers for two or three years. After this period, all premiums from these customers will go to Lemonade.
Lemonade is currently trading at a price-to-sales ratio of 2.6, hovering near its historical lows. Despite this fact, the company is nearly doubling its revenue year over year, indicating that it is still in the early growth phase. Lemonade's gross loss ratio, excluding catastrophes (paid insurance claims and adjustment expenses as a percentage of total earned premiums), was 73%, marking an 8 percentage point improvement year over year.
Considering Lemonade's unique AI and data-driven edge and relatively low valuation, investors should consider taking a small position in this online insurer.
