As we step into March, the S&P 500 is riding high at its all-time peak. However, not all stocks are riding the wave of expensive valuations. For investors with an appetite for risk and a long-term outlook, there are enticing opportunities in the financial technology (fintech) sector. Two companies, in particular, catch the eye as we bid farewell to winter and welcome the changing seasons.
A true disruptor with strong results
Lemonade (NYSE: LMND), the disruptor in the insurance arena leveraging technology to streamline customer experiences, showcased robust performance in the fourth quarter. Surpassing expectations, the company exceeded its revenue, in-force premium, and adjusted EBITDA guidance range. Notably, the narrowing losses reflected in the adjusted EBITDA signal promising financial strides.
Projections from management indicate a cash-flow positive status by 2025, with adjusted EBITDA profitability anticipated in 2026. Bolstering its financial position, Lemonade boasts nearly $1 billion in cash and investments, providing a solid runway for its growth trajectory.
While the reported metrics, including a notable improvement in the loss ratio to 77%, marked a substantial leap from the previous year, the market response was unexpected. Despite these positive indicators, Lemonade’s stock experienced a more than 20% dip post-report. Investor concerns arose from slightly weaker revenue guidance for 2024 and the company’s decision to re-enter growth mode, with heightened growth expenses potentially impacting profitability.
Nevertheless, the overall trajectory for Lemonade remains positive, with all key metrics moving in the right direction. The dip in stock value post-earnings might present an opportunity for astute and patient investors. If management continues steering the company through growth while meeting profit targets, it holds the potential for substantial gains in the long run.
A deep-value fintech with lots of potential
PayPal’s (NASDAQ: PYPL) recent financial performance demonstrates notable strength despite a 2% decline in its active user base during the fourth quarter. The company strategically propelled a 15% growth in total payment volume by focusing on cultivating loyalty among its existing customer base.
Boasting an impressive profitability profile, PayPal consistently generates approximately $5 billion in free cash flow annually and holds a substantial cash reserve exceeding $17 billion. Despite these positive aspects, the stock has endured an 80% slump from its 2021 peaks, primarily stemming from decelerated user growth and a somewhat ambiguous future growth strategy.
The appointment of new CEO Alex Chriss, who assumed the role a few months ago, has ushered in a wave of artificial intelligence (AI)-driven growth initiatives. While the market awaits tangible outcomes, it remains uncertain whether Chriss can steer the company toward substantial revenue and earnings growth.
With a projected earnings per share of $5.10 for 2024, the stock currently trades at a modest valuation of less than 12 times forward earnings. Long-term investors strategically acquiring shares amid the ongoing strategic shift may find themselves handsomely rewarded as PayPal navigates this transformative phase in its business.
Buy for the long term
Predicting the short-term movements of Lemonade and PayPal stocks is beyond my grasp. My decision to include these shares in my portfolio stems from a conviction in the long-term growth prospects of both businesses. I anticipate significant value appreciation over the next 5-10 years.
Acknowledging the potential for a bumpy ride, I remain confident that patient and risk-tolerant investors could find considerable satisfaction in having added these shares at their current levels. The focus lies on the enduring growth potential and the belief that, despite any temporary fluctuations, the trajectory will prove rewarding in the long run.
