LMND

Down 91%, Is It Time to Buy Lemonade Stock?

Lemonade (NYSE: LMND) came out with fourth-quarter earnings recently, but investors weren't pleased with the news given that the shares tanked after the announcement. Nonetheless, this business still posted strong growth trends that are encouraging for long-term investors.

Zooming out, it hasn't been a fun ride for shareholders. As of this writing, the insurance fintech stock is down 91% from its all-time high price, which was set more than three years ago in January 2021. Does this mean it's time to add Lemonade to your portfolio?

Innovation and growth

The insurance industry is one of the oldest parts of the economy, so it has long been ripe for disruption. This is the opportunity that Lemonade's founders saw in 2015 when they started the company.

By using artificial intelligence (AI) and machine learning tools, Lemonade eliminated the need for branches or human sales agents, instead relying on its technology to serve customers. New policyholders can sign up for a product in as little as 90 seconds, while existing customers can have a claim approved in three minutes. This drastically improves the user experience.

Growth has been tremendous. To be fair, things slowed down last year, due to macro headwinds. But revenue and customer count were still up 67% and 12%, respectively, versus 2022. Lemonade's customer base was more than 100% larger than just three years ago, demonstrating the huge expansion this business has experienced.

The company offers five core insurance products: renters, homeowners, auto, pet, and life. The leadership team reported that roughly 5% of current customers use multiple products. This presents a tremendous opportunity to cross-sell, and it will help drive the premium per customer higher over time.

Investors who appreciate Lemonade's business model will likely find no better time to buy the stock than right now. The shares trade at a price-to-sales ratio of 2.6. That's almost a 90% discount to its historical average.

Reasons to be cautious

As is the case with many growth tech stocks, the underlying business has yet to produce consistent profits. And Lemonade is no different. I think this is a concern to pay attention to.

Yes, the company's Q4 2023 net loss of $42 million was a massive improvement from the year-ago period. And executives forecast an "improving bottom line" this year, with positive cash flow in 2025.

Additionally, Lemonade's gross loss ratio in the fourth quarter of 77% is inching closer toward the goal of 75% (the gross loss ratio shows the cost of claims and expenses versus premiums collected). Perhaps this indicates a better ability to assess risk.

But until there are sustainable earnings to point to, Lemonade certainly has financial risk. The business has more than $1 billion of cash, cash equivalents, and investments on the balance sheet. However, how would the company perform in a recession? That's something to worry about.

Despite its focus on innovation, bigger insurance companies like State Farm, Allstate, and Progressive have also invested heavily in technological capabilities. Thanks to their scale and sizable financial resources, I don't doubt that they will prioritize digital improvements, all in the name of better serving policyholders. This will only make the road forward more difficult for Lemonade.

Although it's very easy to get caught up in the excitement surrounding a company that has long used AI in its business and that has what looks like a sizable growth runway, I think Lemonade remains a risky stock to own. There's a lot of uncertainty over the next five to 10 years, so that's why I'm not a buyer today.

However, if you have a higher risk tolerance to wait patiently for management's strategy to unfold, then I can totally understand why it might make sense for you to initiate a tiny position in the stock, especially while it's so beaten down.

Should you invest $1,000 in Lemonade right now?

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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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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