Not all stocks have benefited from the stock market's recent bull run. In fact, some have had disappointing performances this year and remain well off their all-time highs.
For example, shares of Lemonade (LMND 2.31%) sit 91% below their peak. Still, there might be some investors who appreciate what the business is doing and where it might be headed.
But is this beaten-down growth stock a better buy than fintech peer SoFi Technologies (SOFI 1.01%)? Here's what investors need to know about these two companies before coming to an informed conclusion.
Ahead of its time
There's no hotter topic right now than artificial intelligence (AI). Investors are trying to find ways of gaining adequate exposure to this technology, while executives are aiming to position their businesses to benefit from it.
To its credit, Lemonade has been utilizing AI since its founding in 2015 -- way before the tech was drawing all this attention -- to better serve customers in the insurance industry. By not hiring sales agents or operating physical branches, the business can sign up new policyholders and approve claims in mere minutes. This dramatically improves the user experience.
Growth has been key to Lemonade's story. Even in a difficult macro backdrop, the business reported a 67% revenue increase in 2023, with the customer base expanding by more than 200,000 people. Given the size of the addressable market (virtually everyone will need insurance products at some point in their lives), it's easy to be optimistic about the company's potential.
Lemonade's focus on innovation and disruption is commendable. However, the stock is still very risky to own. For starters, the insurance industry is extremely competitive, with some of the most dominant companies also investing heavily in data and technology.
These incumbents have an advantage over Lemonade due to their long operating histories. That matters in the insurance sector, because at the end of the day, it's all about properly managing risks. Despite prioritizing AI and machine learning, Lemonade hasn't yet reached management's goal of getting the gross loss ratio below 75%.
This leads to another concern, which is the lack of profitability. Lemonade reported a cumulative net loss of almost $800 million in the past three years. Wall Street analysts believe the business will keep losing money for at least the next three years. This makes me think twice about buying shares.
Profits to the moon
Like Lemonade, SoFi's investing thesis centers on its growth potential. The digital banking provider was able to increase revenue and customers by 35% and 44%, respectively, last quarter. It's able to attract a younger and higher-income user base, which can help to mitigate risk somewhat, a crucial factor in the financial services industry.
To be clear, banks face intense competition as well, just as insurance companies do. But SoFi does a great job standing out. It offers a savings rate substantially higher than the national average while also providing greater FDIC insurance. That helps explain why its deposit base more than doubled in 2023, a clear indicator of a bank's quality.
This company is at an inflection point. After posting ongoing net losses, SoFi was finally profitable (on a GAAP basis) in the fourth quarter. Executives are confident that SoFi's earnings will soar in the years ahead. They expect earnings per share to total between $0.55 and $0.80 in 2026, up from $0.02 in Q4 last year.
Therefore, I think SoFi is a much safer business to own than Lemonade. However, that doesn't mean it lacks return potential. Shares trade at a price-to-sales multiple of 3.2, which is significantly below its historical average. Should the company continue growing revenue while expanding the bottom line, this fintech stock will likely be a big winner over the long term.
