Could Lemonade 100X Its Business From Here?

Could Lemonade's (LMND -1.72%)business grow 100-fold from its current level? In a recent interview with Lemonade co-CEO Daniel Schreiber, Fool.com contributor Matt Frankel found out that management is aiming for that ambitious target over the long run. In this Fool Live video clip, recorded on Jan 10., Frankel and fellow contributors Jason Hall and Danny Vena discuss whether they think it could actually happen. 

Matt Frankel: This is a high-conviction one for me. I added to my Lemonade position a couple of weeks ago. I interviewed their CEO on Industry Focus a few weeks ago. He told me that he sees this business being able to 100x from here in terms of premiums, and that would make it a mid-level insurance company that wouldn't even make it one of the biggest. It's still a very small insurance company because its core insurance products, renters, and homeowners insurance are not very expensive.

As it adds car insurance and hopefully other types over the years. It has life insurance which is still relatively small as part of its business. But it has a ton of potential to grow its revenue over the years. Its valuation is a little bit high, but as the CEO also pointed out, a lot of it is because people say it trades for your 30 times its written premium or something like that. Because they use a lot of reinsurance policies as their core business model, they're not allowed to count that as premium income in the GAAP accounting rules so it distorts it a little bit.

Jason Hall: Misunderstood.

Frankel: I just think the market doesn't know how to value Lemonade at this point. I think the recent price action is really proof of that.

Hall: Yeah, no doubt about it. Then you look at the short interest in it. I think there's also a lot of people that think it's either overvalued or just don't believe in the business.

Frankel: Danny, any thoughts?

Danny Vena: Yeah, Lemonade is one of those companies that I continue to follow because it's such a highly followed company within the Fool universe. It's one that I'm not particularly sold on yet for a couple of reasons. Which is why I ranked it at No. 4 out of the four [contributors' top stocks for 2022]. I don't own Lemonade yet. It's one that I continue to watch. A couple of things about it. First of all, I still have some of the same lingering questions that Jason had last year, which has to do with the reinsurance aspect of the business. They have not yet built up a book of business where they could reinsure themselves and so they are forced to go outside to other underwriters to reinsure their policies. There's that aspect of the business.

Secondly, while I really like the aspect of the business that they are almost entirely app-based. They use chatbox instead of service reps in 90%+ of the cases, people can apply for the insurance online, so I think all of that is stuff that Lemonade has going for it. But thus far, I'm waiting to see whether or not Lemonade is going to be able to continue to grow.

As you both said, it's still a very small insurance company, and the fact that they are bound by their status to give away a good chunk of their profits means it's never going to be a gangbuster stock, I don't believe, for in terms of earnings-per-share if they're giving away their profits and that may be a misunderstanding on my part. But if I don't have a really good understanding, I'm not much of a buyer of insurance companies anyway. If I was going to own an insurance company, it would probably be Lemonade. But again, I still don't understand the business well enough to be comfortable investing in it.

Hall: I think that's fair, for me, I think the biggest thing is that the risk-reward. You're right, Danny. I think the company still has to answer a lot of those questions. But I'm willing at this price, I'm willing to take on more of that risk.