2021 has not been kind to many growth stocks, and Lemonade (LMND) has been no exception either. Since peaking in January 2021, shares of this New York-based property and casualty insurance company have fallen around 73%, including 40% year-to-date.
Lemonade has been one of the disruptors in the insurance industry because of its use of artificial intelligence (AI) and behavioral economics for providing cost benefits to customers. Currently, it is one of the few insurtech players in this growing industry.
Considering the relatively low valuation at which it is currently trading as well as the name and recognition the company has built for itself through its ambitious designs and multi-product portfolio, we feel it can be a good buy for the long term.
Lemonade is a United States-based company that offers insurance services in the United States and some European regions. Its product portfolio ranges from homeowners’ insurance, renters’ insurance, car insurance, term life insurance, and pet insurance. Apart from that, its insurance products also include stolen or damaged property and personal liability protection.
The best thing about Lemonade’s business is the advanced level of technology it has integrated into its routine operations. Given its current low valuation, we believe there is a relatively high possibility that it can generate multiple times its current value in the next 15 to 20 years.
The past few months might have been difficult for its business because of high inflation rates and potential interest rate hikes by the Fed. However, now the company’s future is expected to improve as the global economy gets back on track.
The company relies extensively on bots and machine learning to attract customers. From the looks of it, Lemonade is on its way to disrupting the insurance industry’s decade-old practices, and that makes it a very attractive stock to watch out for.
Next Opportunity: Auto Sector
Before entering the car insurance sector, Lemonade was in other insurance sectors that had given it a huge marketing opportunity in the United States. Of all those services, term life sales had made up the absolute majority and were followed by pet insurance.
Now, the auto insurance sector can bring a lot of opportunities to Lemonade stock. This can be verified by the fact that back in 2020, there were about 228 million licensed drivers in the U.S, and a huge chunk of them had opted for a car insurance policy.
Moreover, as per research by Million Insights, the global auto insurance market size might reach $1,620.2 billion by 2028, thereby exposing the company to an even larger market going forward.
As entering the auto insurance sector is not that easy and requires time to know the pricing strategy accurately, Lemonade acquired AI-driven insurance broker Metromile, a company that possesses insurance licenses in 49 U.S. states and has years worth of driver data. With this acquisition, LMND’s transition into the auto insurance space is expected to speed up.
With the increase in the number of car insurance users and the auto insurance sector in general, Lemonade will also get the opportunity to cross-sell its other services. So, even if a small percentage of those users start purchasing additional Lemonade products, the company will be able to experience incredible synergies.
Growing Revenues with Widening Losses
Lemonade’s business is growing. In its Q4-2021 results, the company’s in-force premium (IFP) boomed 78% year-over-year, though the rate of growth this time was much slower than the previous quarters. Also, its policy per customer increased by 25% year-over-year to $266, along with a 43% year-over-year increase in customer count. The best thing is its revenue also increased 100% to $41 million.
However, the biggest turn-off about the Lemonade stock is the huge pile of losses it has been building up. Its loss of $70.3 million was almost double the revenue generated, and therefore, investors were extremely disappointed.
Precisely, the company had recorded a loss ratio of 96% during this period despite all the business developments. However, the cash, cash equivalents, and investments totaled $1.1 billion, ensuring there are no liquidity threats as of now.
Its new products have higher loss ratios compared to the older ones, pushing the ratio up further.
Wall Street’s Take
Turning to Wall Street, LMND stock comes in as a Moderate Buy based on three Buys, two Holds, and one Sell rating assigned in the past three months.
The average Lemonade price forecast is $40.50, implying upside potential of 60.8%. Analyst price targets range from a low of $21 per share to a high of $95 per share.
Conclusion
Lemonade might be going through a rough patch now, but the company does have good prospects. Its recent play into the auto insurance sector can also serve as a catalyst for its growth.
Moreover, it already stands out from the generic insurance providers owing to its digital and customer-centric model and aspires to be a one-stop shop for insurance seekers in the coming days.
Nonetheless, the company still has a long way to go, and its immediate focus should be on stopping its cash bleed. So, investors who can play the long-term bet and have a decent risk appetite can consider buying LMND now as it is still very cheap compared to what it used to be trading at.
Discover new investment ideas with data you can trust.
Read full Disclaimer & Disclosure
