Lemonade (LMND 1.43%) was one of the hottest IPOs (initial public offerings) of 2020. That may not be saying much, since every tech IPO seems to be hot these days. But the insurtec (insurance technology) company's stock hasn't lived up to expectations so far. Is there still a chance for it to become a millionaire maker? I think yes. Let's see why.

There's a new disruptor in town

Lemonade was born with the groundbreaking mission to make insurance likable and customer-centric. Lemonade's unique model has several facets that differentiate it from traditional insurance providers to achieve this goal. The major one is its reliance on machine learning and behavioral economics to offer prices to customers and help them file claims. Not only does this make for a faster and simpler process, it cuts the costs of hiring multiple employees to handle the load. 

The digital substrate means that the median time to purchase a Lemonade insurance policy is 90 seconds, and a third of claims are approved and paid on the spot.

The other arm of the company's differentiation is its focus on social responsibility. It's a certified B company, which means that it's held accountable for its actions toward social causes. In Lemonade's case, the structure of how it makes money is that it takes 25% of the customer's premium as its fee. The rest of the money is used for claims, and any left over goes toward a charity of the customer's choosing.

Family drinking lemonade at the pool by their home.

Image source: Getty Images.

An explosive opportunity 

Lemonade has shown some pretty impressive numbers as a public newbie. Customers are buying in, growing to 814,000 over the prior year, a 93% increase. Premium per customer, or the average amount each customer pays for his or her policy, increased 17%, and in-force premium, which is a measure of the aggregate annualized total premium, was up 115%. Gross earned premium, or Lemonade's share of the total, increased 121%, and adjusted gross profit rose over 200%. Gross loss ratio, which measures how many claims are being paid out of premiums, is slowly decreasing and came in at a fairly healthy 67%. Revenue increased 117%. 

Ninety percent of Lemonade's policy holders are first-time buyers of insurance, and many renters turn into homeowners, pushing up premium per customer, which is on average six times as much as a renters policy. 

CEO Daniel Schreiber pointed out that the established insurance companies don't even try to capture this market because of the low premiums. But Lemonade gets them young and aims to keep them happy for when the premiums get bigger. 

Lemonade started with renters and homeowners insurance, but it recently expanded to pet insurance in the U.S. It operates in several global regions such as France, which it entered in July, and it also sells contents and liability insurance in some of these markets. It doesn't even have a license to operate in all 50 U.S. states, so there are still many markets to conquer.

A huge challenge to overcome

Lemonade stock is down 27% year to date as the company continues to show no sign of earnings. Even worse, it's expecting its loss to widen in the third quarter.

There are other challenges, too. Right now, Lemonade only offers limited types of insurance. More established customers who pool all of their insurance needs in one provider may not want to deal with more than one company, even if Lemonade provides a better experience. Also, its younger customer base moves more often than an older cohort, which drives down its retention rate.

It's unclear how soon Lemonade will start making money. But its popularity and differentiated model make it a pretty solid bet to turn a profit in the coming years and take off from there. The upside is vast. It has a solid management team in Schreiber and President Shai Wininger, who both have long histories in tech, and Chief Insurance Officer John Peters comes straight from Liberty Mutual, a large insurance provider.

Another point in the company's favor is that COVID-19 hasn't really made a dent in the company's progress, since its product offerings are completely digital. 

Lemonade definitely has the potential to be a multi-bagger, and over time, become a millionaire maker stock.