3 Things You Must Know About Lemonade Before You Buy the Stock

This beaten-down fintech operator is trying to disrupt the insurance sector.

Lemonade (LMND -2.41%) has done a poor job of quenching the thirst of its investors. Shares of this innovative insurance business currently trade 91% below their all-time high, a milestone reached in January 2021.

Since the start of 2023, shares have climbed 23% (as of May 9). But that gain is much worse than the 36% rise of the S&P 500 and the 56% gain of the Nasdaq Composite Index.

Before you look at adding this fintech stock to your portfolio, which sells at a beaten-down price-to-sales ratio of 2.6, here are three things you need to know. You’ll then be able to make a more informed decision.

1. Lemonade was using AI before it was cool

Lemonade was founded in 2015, so it has a very short operating history spanning less than a decade. But to its credit, this business was focused on artificial intelligence (AI) long before it became such a hot buzzword among executives and investors.

Lemonade sells pet, life, auto, renters, and homeowners insurance. Sounds boring, right? The uniqueness of its business model stems from not having any sales agents or physical branches. Everything is done online.

According to the executive team, Lemonade deploys 50 different AI-powered models that help power the underlying business. This setup supports a fully digital experience for customers. The company says it can sign up a new policyholder in as little as 90 seconds and approve and pay out a claim in as little as three minutes. A notable 50% of claims are paid without any human intervention. Talk about delighting your customers.

In theory, not having to hire any brokers or open brick-and-mortar offices should result in an improved cost structure and better profitability over the long term. That’s what management is hoping for once the business achieves greater scale.

2. Growth has been key

Any business that can offer a superior user experience in an outdated industry has the chance to expand rapidly. I’m sure you’ve seen this playbook before. It has resulted in tremendous growth for Lemonade.

The company raked in $119 million in revenue in Q1 (ended March 31). That was up 25% year over year and 407% compared to Q1 2021. The business now counts 2.1 million customers, a figure that has climbed at high rates.

Lemonade currently sells insurance in the U.S., U.K., Germany, the Netherlands, and France. Unsurprisingly, it has attracted a younger customer base that is more digitally savvy, as is the case with many fintech enterprises. The growth priority is to up-sell products to people as they get older and hit major life moments.

3. Lemonade has a huge market opportunity in a competitive industry

The insurance industry provides a favorable backdrop for Lemonade. That’s because it’s massive. More than $1 trillion in premiums are written in the U.S. each year. Based on its $794 million in active in-force premiums as of March 31, Lemonade has a huge opportunity to try to gain market share.

What’s more, every person will need insurance at some point in their life. That creates a large pool of potential customers to target in the long run, which can result in higher revenue potential.

However, the insurance industry also has some drawbacks. I’d suspect that insurance companies benefit from some level of stickiness, with customers unlikely to switch products as long as they’re satisfied. This means Lemonade will have its work cut out for it as it tries to convert rivals’ policyholders to its own.

Competition is also incredibly fierce. Industry-leading firms, like State Farm, Allstate, and Progressive, haven’t sat around idle. They’re also investing in their own tech and digital capabilities to keep up with the times. This will slowly diminish the advantage Lemonade might have.

If you’re looking to buy Lemonade stock, you now have some basic information about the company’s AI focus, growth trends, and industry setup.

Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lemonade. The Motley Fool recommends Progressive. The Motley Fool has a disclosure policy.

Leave a Comment

Your email address will not be published. Required fields are marked *

Scroll to Top