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Why Lemonade Stock Fell 15% in December

By Jeremy Bowman – Jan 4, 2022 at 11:13PM

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The sell-off in the growth stock continued.

What happened

Insurance disruptor Lemonade (LMND -1.91%) continued to leave a sour taste in investors' mouths last month as the stock's long decline continued. According to data from S&P Global Market Intelligence, shares of the insurtech stock fell 15% in December.

As you can see from the chart below, the stock was volatile but still ended the month down 15%.

^SPX Chart

^SPX data by YCharts

So what

Lemonade has been one of a number of growth stocks that soared early in the pandemic, only to come crashing down this year on concerns about valuation and a lack of profitability. 

The insurance company, which uses an AI model to process claims and sign up new customers instantly, holds the promise of disrupting a massive industry, but a large addressable market alone is meaningless without execution. Thus far, Lemonade has grown briskly but has also put up large losses, leading to concerns that it could have to raise capital as soon as next year. Additionally, the stock still trades at a lofty price-to-sales ratio around 20.

A person standing next to a car writes on a clipboard.

Image source:Getty Images.

There was no significant company-specific news out on Lemonade in December, but concerns about its valuation and cash burn continued to plague the stock, and questions swirled following its acquisition of auto insurance company MetroMile (MILE). Meanwhile, talk about tightening monetary policy from the Federal Reserve has pressured the stock. 

The MetroMile deal will help accelerate the company's path into auto insurance, as MetroMile holds licenses in 49 states. However, as a stock, MetroMile has disappointed after going public as a SPAC in early 2021. Investors reacted poorly to the MetroMile news, which came out at the same time as its third-quarter earnings report, and the stock fell more than 10%.

Now what

Lemonade stock lost 66% last year as an early rally fizzled, and it declined steadily over much of the second half of the year. A combination of market sentiment turning away from high-priced growth stocks and concerns about tightening monetary policy helped sink Lemonade stock.

However, some parts of Lemonade's strategy might be misunderstood. Bears often deride the stock for its wide loss ratio, or the percentage of premiums it pays in claims, which reached 77% in its most recent quarter. Yet the company has a high loss ratio because many of its insurance lines are still new, like homeowners and pet insurance, not because of mismanagement. Over the long term, the company expects the loss ratio on all product lines to be below 75%, meaning Lemonade will make progress toward profitability.

With auto insurance its next major market, the company still has a long growth path ahead of it -- and its valuation looks a lot more reasonable after last year's decline.

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