Is Lemonade Undervalued?

Is Lemonade Undervalued? When tech stocks tanked in 2022, investors got nervous. They sold their shares of tech favorites like Netflix (down 60 percent) and PayPal (down 52 percent) and moved into safer alternatives.

For example, energy stocks like NexTier Oilfield Solutions have been popular in light of rising oil prices. NEX is up more than 130 percent year-to-date.

Companies that provide energy-related infrastructure have also been top sellers. That includes Scorpio Tankers, which handles the transport of petroleum products. STNG increased nearly 200 percent in 2022.

Some investors are tempted to follow the crowd by adding this year’s winners to their portfolios. That’s a mistake. As Warren Buffett put it, “Be fearful when others are greedy, and be greedy when others are fearful.” In other words, the best bargains go to those who are bold during periods of uncertainty.

In light of the substantial decline in tech stock values, bold investors are looking to that sector for the best investment opportunities.

Lemonade Insurance, a fintech company, is getting a lot of attention for its low price, strong growth prospects, and value-driven design. That brings up an important question. Is Lemonade undervalued? Specifically, is Lemonade stock a buy?

Lemonade Is AI For Insurance

Lemonade (NYSE:LMND) launched in 2016 with a mission: to disrupt the insurance industry by integrating technology into every step of the purchase and claims process.

The concept is deceptively simple. Lemonade leverages a variety of advanced technologies, including artificial intelligence, to streamline the application process, quote rates, and pay claims in a matter of minutes.

Lemonade’s founders made it clear that every aspect of the traditional insurance process is under review as they perfect Lemonade’s model.

When the company filed paperwork for its 2020 IPO, the founders wrote, “As transformative as the prior revolutions were for insurance, there is reason to believe that today’s will be even more so. No part of the value chain is immune this time….”

Does Lemonade Have A Moat?

Lemonade is focused on using technology to transform the insurance industry because it knows something other insurance companies haven’t quite come to terms with. Millennials and the generations coming along behind them have entirely new expectations when it comes to the businesses they patronize.

For example, Millennials and Generation Z-ers are digital natives. They are far more interested in financial services companies that promote mobile-first connections over traditional in-person interactions – and that’s where Lemonade shines.

As a group, Millennials can’t always be persuaded by low prices. They will pay a little more if it means partnering with a socially-conscious company. Lemonade checks off that box as well. While it is for-profit, Lemonade was established as a Public Benefit Corporation. That means it considers the needs of all stakeholders, not just shareholders, in making business decisions.

Perhaps more importantly, Lemonade isn’t targeting consumers that have already established relationships with insurers. Generally, Lemonade is going after a younger demographic – people who haven’t yet amassed extensive assets.

At the time of its IPO, approximately 70 percent of Lemonade’s customers were under the age of 35. The long-term plan is to grow with its customer base, becoming the insurer of choice as its existing customers buy houses, start families, and otherwise upgrade their lifestyles.

Lemonade founders pointed out that “Companies built on human brokers and claims agents have many strengths, no doubt, but appealing to millennials and Gen Zers is not chief among them.” Lemonade intends to fill that gap in the industry.

Why Did Lemonade Stock Go Down?

Lemonade’s July 2020 debut on the New York Stock Exchange was wildly successful, with share prices increasing nearly 140 percent in the first day of trading.

The stock peaked in February 2021 at more than $160 per share before moving into a steady descent. At the beginning of 2022, Lemonade stock was below $45 per share, and it has lost almost 50 percent of its value year-to-date.

The drop is primarily due to investors’ mass exodus from high-growth companies that aren’t turning a profit. Lemonade still operates at a loss, and the losses were getting bigger for several quarters.

However, when Lemonade reported its second quarter 2022 results in August, investors started to regain their enthusiasm for the company. Lemonade stock increased more than 17 percent in a matter of days before settling back down to pre-earnings-call levels.

Was that temporary boost a one-time event, or will Lemonade stock recover? Specifically, when current financials are considered, is Lemonade stock undervalued?

Is Lemonade Stock Undervalued?

Industry analysts have mixed opinions about Lemonade. There is an even split between buy, sell, and hold ratings, and 12-month price targets range from $14 per share (a loss of roughly 36 percent) to $40 per share (a gain of more than 80 percent). The median estimate is $26.50, which would deliver just over 20 percent returns to shareholders.

The most optimistic analysts are convinced that Lemonade’s growing revenue and expanding customer base are signs that profits are coming.

Second-quarter revenues increased 77 percent year-over-year for a total of $50 million, and in-force premiums – a key figure in the insurance industry – hit an all-time high of $458 million, representing 54 percent growth.

The company has upgraded its state-of-the-art AI technology to perform functions that were once exclusively handled by humans.

Essentially, insurance premiums are calculated based on the risk a particular customer represents and that customer’s lifetime value to the company.

Humans can only consider a small number of factors in making these calculations. Lemonade’s newest AI platform can pull massive amounts of data together to make far more accurate predictions regarding risk profiles and lifetime value.

In addition to pricing policies more competitively, Lemonade’s AI is designed to identify opportunities for the company to improve its financial performance. It will report inefficiencies and analyze low-performing markets so the company can intervene immediately.

When the company’s revenue growth and expanding customer base are considered alongside its proprietary technology, many investors who are interested in long-term results agree that Lemonade stock is undervalued. Those that are only concerned with short-term profits disagree.

Is Lemonade Stock A Buy?

During the second-quarter earnings call, Lemonade’s top brass said that the investment in new technology and business expansion wouldn’t deliver profits for the third quarter – and in fact, losses will peak in the three months ending September 30, 2022.

However, after that, all of the time and resources Lemonade has put into growing the business and developing best-in-class technology will start to pay off, and the company will be on a direct path to profitability.

Lemonade stock may not hit $40 per share within 12 months as the most optimistic analyst predicted, but all signs point to long-term growth.

Investors who buy Lemonade stock now may realize substantial returns if they have the patience to wait through a bit more volatility. In other words, when it comes to Lemonade stock, profits will come to those who are “greedy when others are fearful.”

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