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2 Fintech stocks that could help you make a fortune

The fintech industry continues to make changes to an industry ripe for disruption. Its offerings forced the financial industry to rethink costly and relatively inefficient processes that had existed for decades. Two of these processes are selling insurance and banking.

Although these fintech stocks face significant risks, Lemonade (LMND -4.87% ) and Sofi Technologies ( SOFI -3.18% ) could change their respective industries and generate outsized gains for investors in the process. Let’s find out a little more about these two fintech stocks that have the potential to make you rich.

Image source: Getty Images.

1. Lemonade tries to refresh the insurance industry

According to the Insurance Information Institute, the industry collected nearly $1.3 trillion in premiums in 2020. Amid these increases, innovation has had relatively little effect on this industry which continues to rely on relatively expensive, full-commission agents.

Cumulative value of insurance premiums written in the United States 2009-2020.

Image source: Insurance Information Institute.

In contrast, Lemonade has developed a model to assess potential customers using AI and behavioral economics. When it collects revenue, the company takes a fee and allocates the rest to industry partners who actually cover all potential claims. If there are funds left over, Lemonade donates them to a charity chosen by the customer.

It sells renter, homeowner, pet and life insurance. Lemonade also recently started selling car insurance, and with its upcoming purchase of Metromile, it will sell car insurance based on the number of miles driven. Such an approach could drive customers away from car insurers.

Lemonade is young and still trying to prove to the market that it can implement its alternative ideas for insurance valuation. Its AI-powered business is currently under pressure. In the fourth quarter, its gross loss ratio, or percentage of premiums paid as claims, rose to 96% from 73% a year ago. This should worry investors since this number has increased due to the insurer’s understatement of claim amounts.

Lemonade hired Sean Burgess away from USAA to serve as claims director to address these issues. But considerable doubts will likely surround the stock if it cannot reduce the raw loss rate.

Additionally, Lemonade generated over $128 million in revenue in 2021, a 36% year-over-year increase. But with spending up 68% over that period, losses nearly doubled to $241 million.

The company forecasts revenue between $202 million and $205 million in 2022, a 58% increase at the midpoint. This faster growth and the drop in the share price of more than 80% since last June could attract investors again. Furthermore, the price-to-sales (P/S) ratio of 11 is near an all-time high.

Given the high cost of its claims, Lemonade is not for risk averse. Still, the stock’s huge discount should lead to massive gains if it fundamentally changes an industry ripe for transformation.

2. The power of the SoFi ecosystem

SoFi was born last year from a merger of a special purpose acquisition company (SPAC) to become one of fintech’s most intriguing public companies. It started by refinancing student loans, a segment that represented about 34% of its loan portfolio in 2021. It then ventured into personal loans, which became its largest segment with 43% of outstanding loans. Home loans make up the remainder of its lending volume. Additionally, it bought Galileo in 2020, giving it an API and payment platform that turned it into a fintech.

However, outside of its SPAC merger, it may have pulled off its biggest coup by buying Golden Pacific Bank. This deal gave SoFi a banking charter, which means it can offer checking accounts, savings accounts and loans without a partner. These offerings have made SoFi a complete financial ecosystem for individuals, similar to what BlockSquare’s ecosystem provides business customers.

Despite SoFi’s potential, it’s a business with significant risks right now. Its revenue of $985 million in 2021 was up 74% year over year. But the company’s net loss in 2021 was $484 million, 116% higher than in 2020. Losses would have grown a smaller 47% had it not been for a $104 million tax benefit in 2020. Nevertheless, SoFi’s growth continues to drive increased losses.

Additionally, in April, SoFi cut its full-year revenue forecast by $100 million, bringing it to $1.47 billion. This assumes that the Biden administration’s moratorium on student loan repayments will not end this year, which will reduce SoFi’s revenue.

Since the SPAC merger on June 1, SoFi’s challenges and tech stock sell-off have caused SoFi’s share price to fall more than 70% from its peak. This brings the P/S ratio to 5, near record lows. However, with its ability to meet banking, lending, and fintech needs in a single ecosystem, more investors may consider skipping risk and open positions.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.