Most Likely to 5x First: Lemonade vs. Upstart
There are high-potential growth stocks in the market, but only a few have the potential to fundamentally change an entire industry. Two in this category are Lemonade (LMND -11.22%)which aims to change the way we buy and use insurance, and Reached (UPST -8.58%)who wants to democratize access to credit.
Neither of these investments is low risk, but both offer huge market opportunities and early results have been quite strong. Here’s a look at the potential of both companies, and the returns investors could see if they’re successful.
The potential of lemonade to change the insurance industry
There are few industries that need disruption more than insurance. The process of obtaining insurance is clumsy at best, and the claims process can be an absolute nightmare. Lemonade aims to be a game changer by making insurance easy to purchase and processing claims in seconds and with minimal hassle. It operates an artificial intelligence (AI) based platform that automates much of the process.
To date, much of Lemonade’s success has come from lower-cost forms of insurance, particularly renters’ insurance, which makes up the bulk of the company’s premiums. However, the company has found ground in homeowners and pet insurance in recent years and is in the process of launching its highly anticipated Lemonade Car auto insurance product on a large scale.
If Lemonade succeeds, the potential here is huge. Even after the recent acquisition of Metromile closes, Lemonade’s total in-force premium is approximately $568 million. The company’s net earned premium in the first half of 2022 was $58.6 million. For context, progressiveit is (RMP -0.57%) net premiums earned for the same period were $24 billion. The auto insurance market in the United States alone is worth approximately $316 billion and is expected to reach approximately $1.6 trillion worldwide by 2028 (Lemonade also does business in international markets).
Upstart’s algorithm could change the way loans are granted
Most loans are approved or denied based on the applicant’s FICO credit score, which has been the industry standard for assessing default risk for decades. And to be fair, the FICO model does a pretty good job for those in the upper credit tiers, but not so much for those in the middle range.
Upstart is a fintech company that aims to incorporate a lot more data into its algorithm to better assess risk. It partners with banks to make loans, and the idea is that by improving risk assessment, its partners can make more loans without increasing their risk of loss, and therefore earn more money.
Upstart has had huge success in the personal loan space, but is beginning to expand into much larger markets – particularly auto and small business loans, which combine for around $1.4 trillion in annual volume. total loans in the United States. If Upstart’s methodology proves to be effective in both good and bad economies, this could be a major disruptor.
Which will produce 5x returns first?
Admittedly, both of these actions come with huge execution risk. If it were easy to create a better way to buy and sell insurance, it would have been done a long time ago. And the same can be said for the disruption of the proven FICO credit score model. However, both have huge opportunities, and if they can implement their respective visions, the payoff for investors could be huge.
In fact, Lemonade could 5x from here and still have a market capitalization less than 15% of that of Progressive, and Upstart trades for around one-fifth of the owner’s valuation of the FICO score Just Isaac (FICO -1.53%)although he has much more upside potential if his pattern succeeds.
It’s also worth noting that both of these stocks were beaten during the recent market downturn. Upstart is around 91% below its 2021 high, while Lemonade is trading over 80% below its high. So both actions could be multiplied by 5 from here and still not return to the levels they have already reached over the past year.
The bottom line is that both companies have the potential to produce 5x returns, or even significantly more, over time. But how quickly they get there will depend on several factors, and it’s unclear which will be the quickest to appreciate. For this reason, I own both in my own stock portfolio and look forward to seeing these exciting companies evolve.
Matthew Frankel, CFP® has positions in Lemonade, Inc. and Upstart Holdings, Inc. The Motley Fool has positions in and recommends Lemonade, Inc. and Upstart Holdings, Inc. The Motley Fool recommends Fair Isaac and Progressive. The Motley Fool has a disclosure policy.