Company / Analytics

Analytics, 25 December 2020

Is Lemonade a stock to buy?

Shares of the digital-based insurance company Lemonade closed Wednesday’s trading 13% higher, despite lack of news from the company or earthshaking developments in the homeowner insurance market. The stock has maintained a pattern of rising prices and impressive share volumes and reached another all-time high of $134.45 on Wednesday, a 93.8% gain from its July IPO price of $29.

Is the stock a buy? What is the future of this insurance provider that continues to attract under 35’s?

What is Lemonade?

Lemonade Inc. is an AI-enhanced upstart dealing in renters, homeowners, and pet health insurance. The company made its public debut in July 2020 with a slew of other tech-forward brands.

Lemonade operates in an industry that isn’t exactly in growth mode. Insurance has been around for centuries, and the fortunes of a typical company in the sector hinge on its ability to attract customers and manage risk.

While it’s a tiny player in the massive insurance industry, Lemonade is growing at a rapid pace as consumers are embracing its artificial intelligence-based insurance sign-up and claim management tools, where you never have to deal with a human insurance agent. The company also passes on the cost savings of this all-digital business model to its customers in the form of lower insurance premiums.

Similarly, investors are applauding the fantastic business results that flow from Lemonade’s disruptive idea.

Is Lemonade a stock to buy?

For investors, one of the advantages Lemonade has over older and larger – but slow-moving – peers is that it’s tiny, having hauled in just $17.3 million in gross profit during the first nine months of 2020. It also had just over 941,000 customers at the end of September 2020. And it’s using AI throughout its operations to grow its customer base and keep costs down. The insurance industry hauls in trillions of dollars globally every year, so suffice it to say there’s plenty of room for Lemonade to grow.

Lemonade’s tech-enabled operations in every stage of its processes - from the insurance sign-up process to the paying of claims - holds a special appeal among younger demographics, and Lemonade could be well on its way to creating a large base of lifelong customers.

It also serves a very limited slice of the insurance market: renters, homeowners, and pet health insurance in the United States, and contents and liability insurance in Germany and the Netherlands.

While this sounds like the perfect investment, some risk is involved. With a market cap just under $6 billion, according to recent rallies, and investors are pricing in quite a bit of growth for the company.

Lemonade also operates at a loss (management expects adjusted earnings before interest, tax, depreciation, and amortization to be at least negative $100 million this year), though it is making progress toward reaching break-even. It had a massive war chest of $576 million in cash and equivalents and no debt at the end of September to cover expected losses, but managing its cash balance in the years ahead will be key.

While the company is not likely to run out of money, its value is too high. If signs emerge that it is losing momentum in picking up new customers, investors could lose value that could take many years to recover.

The current consensus among 8 polled investment analysts is to hold stock in Lemonade Inc. while 6 analysts offering 12-month price forecasts for Lemonade Inc have a median target of 64.00, with a high estimate of 105.00 and a low estimate of 45.00. The median estimate represents a -52.43% decrease from the last price of 134.55, according to CNN Business.

But as with all small disruptive companies, an initial purchase should be kept at a minimum to allow room for further purchases over time.

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