Is Lemonade Stock A Buy?

Lemonade Inc (NYSE:LMND) disrupted the insurance industry using a tech-forward approach to outpace its legacy competitors. The company leverages artificial intelligence to move faster and offer the right products to the right customers.

Lemonade insurance is enormously popular among consumer, but what about as an investment: is Lemonade stock a Buy?

The company is constantly expanding and now operates in 37 states, along with three European countries. This includes France, where it announced in December it’s now offering renter’s insurance. It already has over one million customers, and investors are thirsting for this stock.

Its summer 2020 initial public offering (IPO) priced the company at $1.6 billion, with share prices opening at $29.00 per share. By 2021, Lemonade was valued at over $8.75 billion with shares trading as high $150.00 per share in the first quarter.

This makes it one of the most successful IPOs of the year from an investment standpoint. As investors, we’ll sip some Lemonade to see if downing shares will sour our portfolios or offer a sweet deal at today’s market price.

Lemonade Applies AI To The Insurance Industry

Lemonade is an insurance company using big data analytics, machine learning, and behavioral economics to create a new insurance lane.

Legacy insurance companies notoriously lag in technology, and even insurance giant Berkshire Hathaway (NYSE:BRK.A) CEO Warren Buffett, who owns GEICO, shies away from tech investments.

The company’s expansion outpaced State Farm and Geico, reaching the one million customer milestone over a decade faster. It also donates up to 40 percent of unclaimed premiums to nonprofits each year.

This gives it a positive brand image in an industry the average person neither trusts nor understands very well. With insurance carriers outgrowing banks, their contribution to the global economy equates to about 3.1 percent of U.S. GDP.

Insurance revenues are generated by insurance premiums. And loss ratios determine profits by essentially dividing premiums by payouts. Each insurance line in each state has specific loss ratio targets, and this is a full-time job to track without AI.

Because it has cutting edge technology tools, Lemonade made it look easy to bypass traditional insurance carriers and become a powerful industry player in a $1.2 trillion industry.

Of course, short sellers like Citron Research’s Andrew Left believes it’s all marketing hype. Underneath is more of the same to these bears. The claim by Citron is that none of its technology is necessarily different than what competitors use, and its donations are closer to 0.25 percent than the one-time 40 percent contribution.

This disparity has some investors wondering if Lemonade stock is a buy.

Is Lemonade Stock A Buy?

Lemonade started 2021 with a market capitalization over $8.87 billion, which is about 86 times its past 12-month sales.

Price movement in share prices was relatively slow until November 2020, which sparked a bull run that stretched into the new year.

The price peaked at $188.30 in early January before deflating, but some analysts raised their price targets. Lemonade is trading more like a tech stock than a traditional insurance company.

The company’s gross profit in the first nine months of 2020 was $17.3 million, and this has bearish investors raising flags. Still, Lemonade gets praise from both customers and investors at the moment, and that goes a long way.

Its fraud detection is credited with lowering its loss ratios to 10 percent below the industry average in 2020. The company’s catastrophic (CAT) losses were also 75 percent lower than the industry average during a tumultuous third quarter.

Lemonade raised capital to fund growth by selling 3.3 million new shares after prices multiplied so quickly after the IPO launch. This pushed the stock into a bear rally and highlighted the risks of investing in insurance.

Risks Of Buying Lemonade Stock

Lemonade is trading for a much higher premium than competitors like Progressive and Allstate.

Allstate for example, has a P/E ratio of 7.60. Progressive is near 11.0, and even Berkshire Hathaway (which owns Geico and others) trades for a modest 15.52 times earnings.

Not only is its valuation a hard pill to swallow, but there’s trouble brewing in the insurance industry.

Wildfires and hurricanes left insurance companies with an estimated $10 billion in CAT losses in 2020’s third quarter. Waves of evictions and foreclosures, along with rampant unemployment, could leave insurance premiums unpaid and claims high.

Loss ratios are everything for an insurance company, and even artificial intelligence can’t sidestep natural disasters. Should we face another bad year of catastrophes, life may make too many lemons for Lemonade.

And the competition is trying to put Lemonade on ice.

Can Lemonade Competitors Win?

Lemonade is an insurance broker and underwriter that handles much of the customer interaction through a series of automated email and chat bots. This gives it a temporary leg up on the competition, but new startups like Hippo are on their way.

In fact, Hippo raised $150 million at a $1.5 billion valuation in July to ramp its operations up while Lemonade celebrated its IPO.

Now that the business model is proven, expect to see a lot of competition flooding into the lane it created. Lemonade grew fast enough to get the attention of its legacy rivals and new upstarts. It’s only a matter of time before it finds itself embroiled in corporate warfare.

Still, its customer satisfaction and brand recognition could be enough to carry it through all the insurance jingles and commercials.

Is Lemonade Stock A Buy? The Bottom Line

Lemonade is a disruptive technology-based insurance company that launched its IPO in the summer of 2020. It leveraged AI and machine learning to grow its customer base by over one million within 5 years, compared to over 20 years for its legacy competition.

The company’s stock price gained big in 2020 but is on the downturn at the start of 2021. Short sellers warn it’s overvalued and overpromising on technology readily available to all insurance companies.

Either way, Lemonade is a stock to watch through the next decade. It proved its business model by keeping loss ratios low during a disastrous year. If it can repeat this performance, it could provide great returns for its investors.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.