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Here's Why Lemonade Stock Is Plunging on Thursday

By Matthew Frankel, CFP® - Jan 14, 2021 at 1:36PM

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There are two catalysts potentially driving the stock lower.

What happened

The stock market was largely flat on Thursday, with the S&P 500 index up by about 0.2% as of 12:50 p.m. EST. However, insurance technology disruptor Lemonade ( LMND -6.97% ) continued its streak of volatile moves with shares down nearly 11%.

So what

There are two main catalysts for today's move. First, Lemonade recently announced plans to sell 3 million new shares, and the company announced pricing of the offering this morning. Not only did the offering price at $165 per share (the stock closed at nearly $177 on Wednesday), but at 3.3 million shares, it was bigger than expected. When a company sells new shares, it dilutes existing shareholders, so this is a greater amount of dilution than was expected.

In addition, Lemonade's sell-off accelerated shortly after noon in response to Citron Research saying on Twitter that the stock will go "right back to $100."

Man looking confused.

Image source: Getty Images.

Now what

The tweet by Citron is market noise and isn't terribly material to investors -- especially those with a long-term focus. When stocks quadruple in a few months like Lemonade has, you'll inevitably run into analysts who say the shares are overpriced. 

On the matter of dilution, I'm not terribly worried, and shareholders shouldn't be either. Selling 3.3 million shares at $165 allows the company to raise nearly $545 million. With major plans for international expansion and a life insurance operation starting in 2021, it'll be able to put the capital to good use. And thanks to the massive rally in Lemonade's share price since its summer 2020 IPO, it was able to raise this capital with far less dilution than would have been required.

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.

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Stocks Mentioned

Lemonade, Inc. Stock Quote
Lemonade, Inc.
LMND
$44.06 (-6.97%) $-3.30

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