Insurance technology company Lemonade (LMND -0.06%) has been on fire lately, with shares up by nearly 300% since the beginning of November. However, recent news of a new stock offering has some investors concerned.
On Monday, Lemonade announced plans to offer 3 million new shares of common stock in an underwritten public offering. Other existing stockholders are also selling about 1.5 million shares in the offering. The proceeds from the new shares will be used for general corporate purposes, according to the company's press release.
Shares of Lemonade had a rather volatile session on Tuesday in response to the news. After plunging as much as 9% in the pre-market hours, Lemonade actually turned positive for a bit but was down by about 4.5% at 3:30 p.m. EST.
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Should investors be worried?
Not necessarily. While it's true that this causes dilution, meaning that each share of Lemonade now represents a smaller piece of ownership of the company, it isn't necessarily a bad thing.
Based on Lemonade's share price as of this writing, the offering of 3 million shares will allow the company to raise about $529 million in capital that it can use to fund its ambitious growth plans. Keep in mind that Lemonade plans to launch a life insurance product shortly and has told investors it doesn't plan to stop there.
Here's the key point: By selling 3 million new shares, Lemonade is increasing its share count by about 5.3%. On the other hand, if the company had decided to raise an additional $529 million at the time of its IPO (Lemonade's IPO pricing was $29), the company would have had to sell 18.2 million new shares, which would have diluted the share count by more than 32%.
In a nutshell, Lemonade's higher share price has made it possible to raise the capital necessary to pursue management's vision of a massively disruptive insurance company, without nearly as much dilution to the stock as would have occurred just months ago. You could even argue that it would be a questionable choice for Lemonade to not raise capital at the current level.
