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Down 70%, Is Lemonade Stock a Good Buy Now?

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Is the insurance disruptor worth a closer look for long-term investors?

Insurance technology company Lemonade (LMND -2.50%) hasn't exactly been a top-performing stock in 2021 so far, but what about the company's long-term potential? In this Fool Live video clip, recorded on Oct. 11, contributors Matt Frankel, Danny Vena, and Jon Quast discuss whether Lemonade might be worth a closer look for patient long-term investors who have the risk tolerance to ride out the near-term volatility.

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Danny Vena: There are a couple of things that I'm watching. Lemonade essentially has to turn around and get money from other insurers. It basically is not underwriting all of the policies itself. Am I right in that?

Matt Frankel: That's correct. The life insurance, especially they don't underwrite themselves. Yeah.

Vena: Right. As a result of that, that is an area of their business that I'm just watching closely because if they run into problems getting other insurers to underwrite their policies, they could run into problems. Now, I am totally in line with the fact that they are changing the way insurance companies communicate with their customers. They've got the apps out there. They are communicating with them better. I think they're making a lot of changes to insurance that are good. I think the only reason that I ranked it as low as I did is because we're talking about new money for stocks right now.

Right now I wouldn't put new money into Lemonade, although I'm tempted. But that's the area of the business that I want a little more clarity into before I go sinking a lot of money into it. Because frankly, it's been doing the same business it was doing last year and the stock is plummeting. I think it's a great business so far the stock hasn't caught up with the business.

Frankel: I'd agree with that. Uncertainty is really a word that you'll hear a lot in reference to this stock, and that's a lot of people's reservation. I don't want to say it's a binary outcome, but it is in a way. If they can replicate their renters insurance success, this could be a 10X stock easily. If they can't, 44 times sales for an insurance company is very, very expensive. Jon, I believe you own Lemonade as well, don't you?

Jon Quast: Yes. I do, Matt. The reason that I bought Lemonade initially is because I do like how the business model aligns with consumer desires is the best way I can put this. Because they only make a percentage is Lemonade's profit. The rest is donated to the charitable cause of the user's choice. This has a very powerful factor of aligning corporate and consumer values. I like that. I also like what you're talking about, the optionality of all these different insurance features because I'll tell you as a consumer, I personally prefer to be able to have multiple things in one place. I don't want to be tracking down a bunch of different monthly bills. If I can consolidate, great. I love these two aspects. As an AI company, the AI is proven or disproven based on the net loss ratio. Am I accurate in saying that, Matt?

Frankel: Over the long run, it should trend in the right direction.

Quast: That's the key. Over the long term, we're watching these AI algorithms to see if they can improve the outcomes, and that will be reflected in the net loss ratio. Now, right now, we've had hurricanes, the Texas freeze, all these things that are impacting those fundamentals, and it just got muddy for me. This is why I haven't added new money to Lemonade right now, because the outcome is really going to be driven by the AI software. I can't tell if that AI is getting better or worse right now because of all these outside factors. I'm waiting for the water to settle, the water to become clear because right now it's really muddy for me.

Matthew Frankel, CFP® 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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