The benchmark S&P 500 index is sitting on a gain of 24% this year (including dividends), which is way above its average of 13.7% over the last 10 years.
But most of this year's gains were delivered by a group of mega-cap technology stocks called the "Magnificent Seven." It includes Apple, Microsoft, Amazon, Alphabet, Nvidia, Tesla, and Meta Platforms.
Together, they account for 28% of the value of the S&P 500. Therefore, the seven tech giants have a huge influence over the general direction of the market, and each of them has significantly outperformed this year -- Nvidia, Tesla, and Meta Platforms have each doubled.
Small caps have been left behind
The Russell 2000 index is a great barometer of performance for the smaller end of the market, because it's filled with stocks valued at less than $2 billion.
It delivered a return of just 13% in 2023 so it's underperforming the S&P 500 by a wide margin, and it actually spent several months trading in the red. High inflation and rising interest rates often hurt small companies the most because they need to access capital to grow. Giants like Apple and Microsoft have tens of billions in liquid cash at their disposal, so investors find safety in those names during economic turbulence instead.
Two stocks in the Russell 2000 are GoPro (GPRO +7.09%) and Lemonade (LMND +0.66%). Neither is very popular on Wall Street at the moment; they have attracted just one buy rating each, according to the analyst ratings tracked by The Wall Street Journal.
But they might not be neglected for much longer. I'm going to tell you why I think both stocks could soar in the new year.
Image source: Getty Images.
1. GoPro: Unlocking new, high-margin revenue streams
Selling action cameras priced at $399 a pop isn't easy in a cost-of-living crisis where consumers are fighting rapid increases in food prices and mortgage repayments. As a result, investors shunned GoPro stock in 2023, sending it down 30%. But in my opinion, the company's valuation is borderline irresistible.
GoPro currently has a market capitalization of just $519 million, yet it's on track to deliver $1.04 billion in revenue this year so it's trading at a price-to-sales (P/S) ratio of just 0.5. It traded at a P/S ratio of 1.8 in 2021, so its stock would have to triple from here just to return to that level. It also traded at a P/S ratio above 4 shortly after it came public in 2014.
GoPro is expected to grow its revenue by just 8.6% in 2024, which is one of the main reasons for its tiny P/S ratio. But that isn't the whole story, because the company introduced lucrative subscription-based revenue streams that are growing significantly faster than its top line overall.
NASDAQ: GPRO
Key Data Points
Its GoPro.com subscription is priced at $49.99 per year, and it gives customers exclusive product discounts, unlimited cloud storage for their videos, and livestream capabilities. As of the recent 2023 third quarter (ended Sept. 30), it had over 2.5 million subscribers, which was a 20% increase from the same time last year. That's enough to generate almost $125 million in annual recurring revenue, and since subscriptions don't carry high input costs, that revenue could have a gross profit margin of up to 80%.
GoPro is also planning to launch a Premium+ subscription priced at $99.99 per year, which will include access to advanced desktop-based content editing software. That means the company could unlock even more high-margin revenue in the new year.
As for GoPro's core business, it placed its action cameras in 2,500 new stores around the world this year and plans to add 3,000 more in 2024. That will take its total footprint to 25,000 stores globally, marking an increase of 30% since May this year. It sets the company up for a growth resurgence next year especially if economic conditions improve, so Wall Street might regret overlooking GoPro stock.
2. Lemonade: Primed for the artificial intelligence boom
Lemonade is an insurance provider with a twist. The company leans on artificial intelligence (AI) to handle everything from customer interactions to pricing premiums, and it's experiencing incredible success -- don't be fooled by its stock price, which is down 89% from its all-time high. Investors got a little carried away with the company's valuation during the tech frenzy of 2021, but it now trades at a far more reasonable level, which I think is attractive ahead of the new year.
Lemonade operates in five insurance markets: renters' insurance, homeowners' insurance, pet insurance, life insurance, and car insurance. Its AI chatbot, Maya, can be found on the Lemonade website, and it's the first point of contact for most potential customers. It can produce an insurance quote in just 90 seconds without any input from a company employee, according to the company.
Similarly, another bot called AI Jim can pay claims in under three minutes, also without human intervention on most occasions. This automated approach is far less frustrating than dealing with manual, slow claims processes at most traditional insurers, and it's proving incredibly popular. As of the recent 2023 third quarter (ended Sept. 30), Lemonade had almost 2 million customers, which is impressive given it only launched its first product in 2016.
NYSE: LMND
Key Data Points
Lemonade also uses AI extensively behind the scenes. Its Lifetime Value 6 (LTV6) model was released in 2022, and it was capable of predicting how likely a customer was to make a claim, how likely they were to buy multiple policies, and how likely they were to switch insurers. Those factors helped Lemonade price premiums as accurately as possible. But the company is now up to LTV8 and will soon launch LTV9, with each model more advanced than the last.
Lemonade offers customers everything they could want in an insurer: a fast signup process, a fast claims process, and accurate premiums, which can save them money in the long run.
Lemonade is on track to deliver $422 million in revenue in 2023, which will be a 64% increase compared to 2022. Yet the company is valued at just $1.2 billion, placing its stock at a price to sales ratio of just 2.6. That's near the cheapest valuation since Lemonade came public in 2020.
AI will likely remain a dominant market theme in 2024, and believe it or not, Lemonade is one of just a few companies successfully monetizing the technology. In my opinion, it won't be long before Wall Street and everyday investors latch onto this great opportunity.
