The S&P 500 is hovering around its all-time high as we head into March, but that doesn’t mean that all stocks have become expensive. There are some excellent opportunities for risk-tolerant long-term investors, especially in the financial technology, or fintech, industry. Here are two companies, in particular, that look like incredible buys as winter comes to a close.
A true disruptor with strong results
Lemonade (LMND 4.19%) is an insurance company that aims to disrupt the traditional model by using technology to alleviate consumer pain points. For example, claims can be processed in seconds instead of days in many cases and getting (and accepting) insurance quotes is a seamless process.
In the fourth quarter, Lemonade reported surprisingly strong results. It surpassed the high end of its guidance range for revenue, in-force premium, and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). The latter showed that losses are narrowing rather quickly.
Management said it expects to be cash-flow positive during 2025 and that the business will achieve adjusted EBITDA profitability in 2026. With nearly $1 billion in cash and investments, the company has plenty of runway to get there.
Not only did all of these metrics look great, but the company’s loss ratio came in at 77% — a big improvement over the 89% figure from the fourth quarter of 2022 and just above its 75% long-term target. (To be fair, the fourth quarter is seasonally strong for insurance profitability.)
Despite the generally stellar results from the business, Lemonade’s stock went down by more than 20% after the report. Not only did management’s revenue guidance come in a little weaker than investors were hoping for in 2024, but the company said it’s returning to growth mode in 2024 and increased growth expenses could put pressure on profitability.
Even so, the company’s numbers are all heading in the right direction. If management can keep the business growing and deliver on its profit targets, it could be a massive win for patient investors.
A deep-value fintech with lots of potential
In many ways, PayPal‘s (PYPL 0.33%) recent results were rather strong. Even though its active user base declined by 2% year over year in the fourth quarter, the company grew total payment volume by 15%, thanks to its focus on engaging its most loyal customers.
The company is very profitable, generating about $5 billion in free cash flow annually. This goes along with the more than $17 billion in cash on its balance sheet.
PayPal’s stock has been beaten down in recent years, as user growth slowed and the company’s future growth strategy has been unclear. As a result, PayPal is down about 80% from its 2021 highs.
New CEO Alex Chriss, who took over a few months ago, is already rolling out several artificial intelligence (AI)-driven growth initiatives. For the time being, however, it remains to be seen whether he can return the company to meaningful revenue and earnings growth.
PayPal is expected to generate $5.10 per share in earnings during 2024, so the stock trades for less than 12 times forward earnings. Long-term investors who add shares while this massive business is in the middle of a strategy shift could be handsomely rewarded.
Buy for the long term
I have no idea what Lemonade and PayPal stock will do in the coming weeks or months. I own shares in my portfolio because I believe in the long-term growth potential of both businesses and think both stocks will be worth considerably more in 5-10 years than they are today. I expect a bit of a roller-coaster ride along the way, but patient and risk-tolerant investors eventually might be thrilled they added these shares at current levels.
Matt Frankel has positions in Lemonade and PayPal. The Motley Fool has positions in and recommends Lemonade and PayPal. The Motley Fool recommends the following options: short March 2024 $67.50 calls on PayPal. The Motley Fool has a disclosure policy.
