More like 5x First: Lemonade vs. Upstart

There are some high-potential growth stocks out there, but few that have the potential to transform an entire industry. Two are in this category lemonade (LMND -11.22%)that aims to change the way we buy and use insurance, and upstart (UPST -8.58%)which wants to democratize access to credit.

Neither are low-risk investments, but both have tremendous market potential and early results have been pretty strong. Here’s a rundown of both companies’ potential and the returns investors could see if they succeed.

Lemonade’s potential to transform the insurance industry

There are few industries that need more disruption than insurance. The process of getting insurance is cumbersome at best, and the claims process can be an absolute nightmare. Lemonade aims to change the game by making it easier to buy insurance and process claims in seconds and with minimal effort. It runs an artificial intelligence (AI) driven platform that automates much of the process.

To date, much of Lemonade’s success has come from lower-cost forms of insurance, most notably renters insurance, which makes up the majority of the company’s premiums. However, the company has gained a foothold with homeowners and pet insurance companies in recent years, and is in the process of launching its much-anticipated Lemonade Car auto insurance product in a big way.

If Lemonade is successful, the potential here is huge. Even after closing Metromile’s recent acquisition, Lemonade’s total premium is approximately $568 million. The company’s net premiums earned were $58.6 million for the first half of 2022. for context, Progressive‘s (PGR -0.57%) net premiums earned for the same period were $24 billion. The auto insurance market is approximately $316 billion in the United States alone and is expected to reach approximately $1.6 trillion globally by 2028 (Lemonade also operates in international markets).

Upstart’s algorithm could change the way loans are made

Most loans are approved or denied based on the applicant’s FICO credit score, which has been the industry standard for assessing credit risk for decades. And to be fair, the FICO model does a pretty good job for those in the upper credit grades, but not so much for those in the middle grades.

Upstart is a fintech company that aims to integrate far more data into its algorithm to better assess risk. It works with banks to lend, and the idea is that by improving risk assessment, its partners can lend more without increasing their risk of loss, and thus make more money.

Upstart has had tremendous success in the personal lending industry, but is beginning to expand into much larger markets — particularly auto and small business lending, which together account for approximately $1.4 trillion in total annual lending volume in the U.S. if Upstart’s methodology proves successful This is effective in both good and bad economies and could be a major disruptive factor.

What brings 5x returns first?

Of course, both of these stocks have huge execution risk. If it were easy to create a better way to buy and sell insurance, it would have happened a long time ago. And the same goes for disrupting the tried and tested FICO credit scoring model. However, both have tremendous opportunities, and if they can execute on their respective visions, the upside could be huge for investors.

In fact, Lemonade could 5x from here and quiet have a market cap less than 15% that of Progressive, and Upstart trades for about a fifth of the FICO Score owner’s valuation The beautiful Isaac (FICO -1.53%)although it has far more upside potential if its model is successful.

It’s also worth noting that both of these stocks have come under pressure in the recent market weakness. Upstart is about 91% off its 2021 high, while Lemonade is trading more than 80% off its peak. So both stocks could be up to 5x from here quiet not return to the level they reached last year.

The bottom line is that both companies have the potential to generate 5x returns, or potentially a lot more, over time. But how quickly they get there depends on several factors, and there’s no telling which is the quickest to estimate. For this reason, I own both in my own stock portfolio and can’t wait to see the development of these exciting companies.

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.

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