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Lemonade Stock Tanks as Growth Stocks Lose Their Luster

By Jon Quast - May 10, 2021 at 5:23PM

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The company is set to report earnings tomorrow, and the market will be looking for strong revenue growth.

What happened

Shares of insurance-technology company Lemonade (LMND 5.29%) tanked 10.2% on Monday. Normally, you'd expect to find news specific to the company with a drop like this. But today, the market was punishing tons of stocks, including some of the best performers from 2020 and recent IPOs. Lemonade is both.

So what

To be clear, Lemonade didn't report anything today that made shareholders lose confidence. And there weren't any analysts downgrading the stock either. Remember, that following the company's 2020 initial public offering (IPO), it was a big winner. It finished the year up roughly 76%. But in terms of the market today, many of these kinds of stocks took a big hit. 

A falling, red arrow crashes down through a floor as a businessman looks on.

Image source: Getty Images.

The exact reason for today's sharp decline in growth stocks is up for debate. However, it's clear that Lemonade was down today for no fault of its own. There should be a measure of comfort in this for shareholders.

Now what

Buy-and-hold investors accept trading volatility and instead focus on business results as they play out over the long term. For Lemonade, it reports first-quarter results tomorrow, May 11, after the market closes. For Q1, it expects to report revenue of $21.5 million to $22.5 million, and for the year it anticipates revenue of $114 million to $117 million. At the midpoint of full-year guidance, it would have year-over-year growth of 22%. 

To be sure, 22% revenue growth is good. However, Lemonade stock currently trades at a pricey price-to-sales ratio (P/S) of 46. Investors seem to be more concerned about valuations in recent days, and a P/S of 46 is a hefty price tag for 22% annual revenue growth. If Lemonade misses expectations, it could lead to further downside in the short term. However, with now over one million customers and new verticals like car insurance, many see reason for long-term optimism. Time will tell.

Jon Quast owns shares of Lemonade, Inc. The Motley Fool owns shares of and recommends Lemonade, Inc. The Motley Fool has a disclosure policy.

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