One of the more intriguing stocks to debut on the market this year is Lemonade (NYSE:LMND), a tech-based insurance company that is attempting to disrupt a massive industry.

The stock surged in its market debut, more than doubling to $70, but has pulled back to $50, offering investors a more appealing entry point. Is Lemonade a buy or a sell today? Let's take a closer look at what the recent IPO has to offer.

A drawing of a dragon spitting fire at a city

Image source: Lemonade.

What is Lemonade?

Founded in 2015, Lemonade is a new kind of insurance company with a digital-first model that is attracting millennials and other young adults. It uses artificial intelligence bots to process new customers and claims, and also distinguishes itself from most insurance companies as a B Corporation, meaning that it is focused on social and environmental goals in addition to making a profit. The company donates excess premiums (after the 25% that it keeps for itself) to nonprofit organizations chosen by its customers, which it believes acts as an incentive for customers to choose Lemonade and a check against exaggerated claims, as that would mean those nonprofits would get less money.

Lemonade currently offers renters, homeowners, and pet health insurance in the U.S., and contents and liability insurance in Germany and the Netherlands.

The growth path

As a young company with a disruptive model in a huge industry, Lemonade has posted skyrocketing growth throughout its history. Revenue last year tripled to $63.8 million, and its customer count grew 84% in its most recent quarter to 814,160, driving revenue up 117% to $29.9 million.

It's also penetrating a giant industry with a total addressable market in property, casualty, and life insurance of $5 trillion globally, showing the company could continue to put up high growth numbers for years ahead.

Lemonade grows in a number of ways. First, by adding new customers. As the near-doubling of customers in the recent quarter shows, that pipeline is strong, especially as Lemonade gets most of its business from consumers who have never had insurance, rather than poaching them away from competitors. About 70% of its customers are under age 35, and 90% of its customers said they were new to insurance.  

Because of its young customer base, Lemonade also sees revenue grow as customers' insurance needs grow. For instance, the average 30-year-old spends about $60 a year with Lemonade while the typical 40-year-old spends $600 a year on the platform. Renters tend to graduate on to paying condo or homeowners insurance, which costs on average $900 per year compared to $150 per year.

Finally, Lemonade is growing by adding new lines of insurance and expanding geographically. For instance, earlier this year it added pet health insurance in the U.S., and could expand into areas like auto and life insurance.

The risks

Lemonade is still deeply unprofitable. Last year, its net loss by generally accepted accounting principles (GAAP) more than doubled from the prior year to $108.5 million. Though metrics like its loss ratio are improving, the company is likely to experience losses for the foreseeable future as it focuses on growth and spends in areas like marketing.

Chief among its risk factors in its prospectus, the company warned, "We expect that our net loss will increase in the near term as we continue to make such investments to grow our business. Despite these investments, we may not succeed in increasing our revenue on the timeline that we expect or in an amount sufficient to lower our net loss and ultimately become profitable."

Additionally, Lemonade faces stiff competition from deep-pocketed incumbents and other upstarts. Disrupting a massive industry is never easy, and traditional insurance companies are embracing many of the digital tools that are central to Lemonade's business. The company recognizes that entrenched insurance providers have a number of advantages over it, including better name recognition, more types of insurance to offer, and better access to capital.

Lemonade stock is also pricey, as the company is valued at around $3 billion with steep losses and a price-to-sales ratio around 30, giving it a valuation that's comparable to high-priced SaaS (software-as-a-service) stocks. If the company's growth doesn't materialize as investors hope, the stock could fall a long way.

Buy or sell?

Lemonade has plenty of risks, as it's a high-priced stock with an unproven business model that is seeking to disrupt a huge industry. However, the upside potential seems to outweigh the risks here as the company is seeing triple-digit revenue growth, showing, along with a high net promoter score, that consumers like the product. Additionally, employees seem to love the company, as it rates 4.9 on Glassdoor and 97% of respondents said they'd recommend it to a friend, while 98% said they approve of CEO Daniel Schreiber. Its social mission also helps it stand out from competitors.

Overall, the company has many of the components necessary to be a 10-bagger stock: Fast revenue growth, a huge addressable market, a disruptive business model, and high employee and customer satisfaction. While the stock is clearly risky, there's a decent chance it will be worth much more in five years than it is today.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.