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Why Lemonade Stock Dropped 13% Last Month

By Jennifer Saibil – Sep 5, 2021 at 10:35AM

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The artificial intelligence-based insurance company still isn't demonstrating enough growth to please investors.

What happened

Share of insurance-tech company Lemonade (LMND 4.14%) fell 17% in August, according to data from S&P Global Market Intelligence. The stock still trades at a sky-high valuation, and second-quarter earnings weren't spectacular enough to soothe investors. 

So what

Lemonade tumbled from a hot IPO stock last year to an underperforming holding in 2021. Revenue hasn't demonstrated strong growth, although changing deals with third-party reinsurers make that metric difficult to quantify. The company saw its loss ratio rise after it was hit by its exposure to the Texas deep freeze in the first quarter, further disappointing investors. And it's not showing any signs of nearing profitability. In all, Lemonade hasn't been able to show that it's a growth stock that's going places -- at least not yet.

A woman sitting in front of a computer, holding and looking at a phone, and sipping a glass of lemonade.

Image source: Getty Images.

On the other hand, there are signals of improvement, such as accelerating growth in its premium per customer. Lemonade has been focusing its efforts on product launches, and its strategy in this phase has been to offer a larger suite of products to win customers to its brand. Last year, it launched pet and term life insurance to its renters' and homeowners' products, and this year it's planning to roll out auto insurance. Lemonade Car could be a game-changer, since its market is larger than other current Lemonade products. 

Lemonade has also built up its customer base to 1.2 million as of the end of the second quarter. Customers are drawn to the easy and almost entirely digital process and quick claim approvals. Those approvals can take as little as a single second.

Now what

Lemonade may impress investors in the third quarter, as newly restructured reinsurer agreements should result in revenue growth. However, Hurricane Ida and the California wildfires may take a toll on its loss ratio. Whenever the Lemonade Car rollout finally happens, investors are likely to be happy. 

Management seems to feel comfortable with where the company is at, and its progress is going according to schedule, including all the expected bumps on the ride. Investors who buy in now might see large rewards in the future, but there's definitely risk involved, and lots of volatility.

Jennifer Saibil owns shares of Lemonade. The Motley Fool owns shares of and recommends Lemonade. The Motley Fool has a disclosure policy.

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