Please ensure Javascript is enabled for purposes of website accessibility

This Growth Stock Could 10x in 10 Years

By Trevor Jennewine – Aug 5, 2021 at 8:00AM

Key Points

  • Lemonade’s market opportunity exceeds $400 billion, and its AI-powered business model differentiates it from other insurance companies.
  • Lemonade stock could grow tenfold by 2031.

Motley Fool Issues Rare “All In” Buy Alert

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Lemonade is using big data and artificial intelligence to shake up the insurance industry.

Insurance is one of the largest industries in the world, generating over $5 trillion in premiums each year. But it's also a highly fragmented industry. In fact, many of today's leaders have been around for a century or longer, and none has more than 4% market share. Moreover, these titanic enterprises were built on old technologies, meaning they weren't designed for state-of-the-art data science.

But Lemonade (LMND 4.14%) was built for big data. Here's why this stock could grow tenfold over the next decade.

Investor looking at upward trending chart.

Image source: Getty Images

Lemonade's market opportunity

Lemonade is an AI-powered insurance company. Its digital-first, mobile-friendly platform currently offers homeowners, renters, pet, and term life policies across the United States, France, Germany, and the Netherlands. And recently, the company announced Lemonade Car, an auto insurance product slated to launch in the near future.

Collectively, management puts Lemonade's market opportunity at over $400 billion, and $300 billion of that figure comes from Lemonade Car. That means this new product could be a significant catalyst in the years ahead.

Lemonade's advantages

Lemonade has two key advantages, and the first relates to data. Case in point: Legacy insurance companies ask 20 to 50 questions on a typical homeowners policy form, meaning they collect 20 to 50 data points. By comparison, Lemonade's digital platform surfaces 1,700 details, and the application process takes just two minutes.

How is that possible? Lemonade uses AI chatbots to engage consumers, and its platform was designed for types of data that legacy systems can't capture. For instance, in addition to the standard questions, Lemonade also collects details like time of day, type of device, and length of time spent on the application. Using these clues, the company can predict risk by making correlations between seemingly unrelated data points.

Ultimately, this advantage should allow Lemonade to underwrite policies and detect fraud more effectively than its rivals. Put another way, its loss ratio (i.e. the percentage of premiums paid out in claims) should be lower than average, meaning the company should keep more cash. That, in turn, should drive lower prices for consumers.

Lemonade's second advantage is its unique business model. The bottom line is black and white for traditional insurers: Collect premiums and pay claims and expenses, and anything left over is profit. Of course, that creates a conflict of interest, as there is an incentive to deny claims.

To solve this problem, Lemonade takes a fixed-fee approach. In a nutshell, it keeps 25% of premiums, then uses the rest to cover claims and expenses. And if anything is left over, Lemonade donates the money to charity. That means the company doesn't benefit from denying claims, at least not to the same extent as legacy insurance providers. Put another way, Lemonade's values are better aligned with those of its clients.

Lemonade's financial performance

It's still early, but Lemonade's financial performance shows promise. Its gross loss ratio dropped from 113% in 2018 to 71% in 2020, though it did spike to 121% in Q1 2021. However, that was due entirely to winter storm Uri in Texas, a market where Lemonade's business has historically been highly concentrated. On the bright side, the company is diversifying a little more each year.

More importantly, if you exclude the impact of those catastrophic losses, Lemonade's loss ratio would have been 71% last quarter -- roughly 11 percentage points lower than the industry average. That suggests that Lemonade's AI-powered platform is indeed more efficient than legacy systems.

More importantly, consumers love Lemonade. According to a report from Clearsurance, Lemonade is the most highly rated provider of homeowners and renters policies, and I think the company can take the top spot in the auto category after the launch of Lemonade Car.

Not surprisingly, Lemonade's ability to delight consumers has translated into significant demand, as evidenced by the company's rapid growth.

Metric

Q1 2019 (TTM)

Q1 2021 (TTM)

CAGR

Customers

371,571

1,096,618

72%

Gross profit

$4.4 million

$22.1 million

124%

Data source: Lemonade SEC filings. TTM = trailing-12-months. CAGR = compound annual growth rate.

Looking ahead, Lemonade certainly faces some tough competition, and the stock currently trades at a very pricey 55 times sales. But disruptive tech companies often face similar situations, and none of those hurdles are insurmountable.

More to the point, Lemonade is building its business around big data, and I believe that will give the company a sustainable advantage. That should help Lemonade capture a good chunk of its enormous market opportunity. That's why this growth stock could grow tenfold by 2031.

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

Invest Smarter with The Motley Fool

Join Nearly 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Lemonade Stock Quote
Lemonade
LMND
$19.85 (4.14%) $0.79

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
349%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/30/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.