Here's Why Lemonade Could Still Be a Big Long-Term Winner

With shares down by about 80% from their 2021 peak, insurance technology company Lemonade (LMND 0.83%) hasn't exactly been a strong performer recently. However, in this Fool Live video clip, recorded on Jan. 10, Fool.com contributor Jason Hall discusses why the disruptor could still be a great stock for patient long-term investors, especially at its new lower price tag.

Matt Frankel: This is Lemonade, ticker symbol LMND. Jason, why don't you tell us about Lemonade, which went from quadrupling from its IPO price to less than its IPO price?

Jason Hall: Yeah, I'm going to pull up a chart I want to share because it really sets the table very well. It IPO'd at $29 and then the first day of trading was like $60 a share, so it doubled the first day of trading. Then from there, it just absolutely continued to skyrocket and doubled from the initial trading price early last year.

I will be the first to say, this period last year, January, February, March of last year, I was very reticent about Lemonade because the thing that it hadn't really proved at that point was the most important thing is how good of an insurer is this, the underwriting business of quality of its ability to price insurance. Yeah, there's a lot of focus on the fact that, well, the company has reinsurance so it's passing along that underwriting risk, but there's still risk there because if you're underwriters, your reinsurers, take a hit, your reinsurance rates are going to go up. You're going to have to pass that cost along to your insured customers.

That was my biggest concern is back at those crazy prices, that a $100, $150 a share, which works out to 15 times book value, I just really struggle with Lemonade at this price. I really did. Now, what has Lemonade done since then? Well, the biggest thing is the value. It's dropped to like two times book value. It's growing its insurance book at about 80% to 85% a year. It added 150,000 new customers from the end of the second quarter to the end of the third quarter. In three months, it grew its customer count by more than 10%.

It's absolutely growing like wildfire, it grew its customer count like 40,000 or 45% year-over-year and that's before the big thing that happened after the end of the quarter and that was the launch of Lemonade auto or Lemonade Car, which is its auto insurance business, which has been investing a lot of resources in building. Then after they launched it, they announced, which I think could prove to be a transformative acquisition and that was the acquisition of Metromile (MILE) for 1.2, 1.3 times book value. So, they are buying an auto insurer that's had a little challenge getting a lot of traction at a really cheap book value. They're getting a bunch of cash along with the deal. They're getting all of the Metromile's customers and they are getting licenses in 48 states, I believe 48, 49 states, so almost every state and that's a big deal with insurance because it's regulated at the state level, is to potentially get access to those states so much more quickly.

I think it could prove to be like rocket fuel for what will prove to be its highest dollar value insurance product, auto insurance. I think at this point, trading for two times book value is really interesting. What's the case for Lemonade for anybody that doesn't know it, this is a business that they talk about AI while using claims to help get policies quoted like all of those sorts of things. But they also have an economic model, I think it doesn't get enough appreciation. That's the fact that they've built their business to break down some of those traditional barriers where economic incentives are aligned between the insurance company and paying claims, so they've broken down some of those barriers.

They've created economic alignment for their customers in the terms of taking acertain amount of profits above a certain amount and giving them to your favorite charities to help keep their customers honest when it comes to filing claims. I think there's a lot of things they've done, they've created a lot of goodwill, and I love this business. It's not a value stock at two times book value because they're still burning a lot of cash because they're piling money into the business to get to scale. But if they prove that the economic model they have works and is interesting in a mass market and not just the niche product and at scale their underwriting pays off and they're a profitable business, two times book value is going to be crazy cheap when we look back in five years.