What happened
Shares of digital insurance company Lemonade (LMND 1.64%) fell 24% in January according to data provided by S&P Global Market Intelligence. The company's stock has been falling for months, and it was a victim of the broader tech stock sell-off and market volatility that continued into January.
So what
Lemonade disappointed investors in 2021. It posted a huge loss ratio in last year's first quarter after the Texas freeze, when there was a severe storm that caused tremendous damage in one of Lemonade's biggest markets. In the third quarter, the investor community wasn't thrilled with its announcement that it's acquiring auto insurance technology company MetroMile.
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These events clouded Lemonade's huge achievements last year. The company demonstrated sustained growth, with in-force premium, its top-line growth metric, posting year-over-year increases of around 90% every quarter. Premium per customer grew around 20% each quarter. And due to changes in its third-party reinsurance agreements, revenue increased 101% year over year in the third quarter.
Lemonade executed an aggressive growth strategy last year, launching pet, term life, and auto insurance. This put pressure on its bottom line and its loss ratio, since newer products typically have higher loss ratios. Lemonade became a popular meme stock and highly shorted stock as the once market darling lost a lot of cachet.
There was no significant news related to Lemonade in January, but investors switched from growth stocks to value stocks in droves. The macroeconomic environment, with inflation and global supply chain issues, continues to plague business operations and compelled investors to move out of growth stocks and into value stocks last month.
Now what
Lemonade stock has been a pretty terrible performer as investors lose confidence in its prospects. But I don't see all this fear as warranted. Lemonade is dealing with growing pains, which are normal for a company at its stage. It's not a value stock, and investors shouldn't view it as such. The company has a huge amount of potential and is capturing market share. Importantly, customers love its products, and it offers a competitive alternative to traditional insurance, a large and profitable industry. There's so much opportunity here. The company has a viable way forward, although it's taking time for it to scale. The strategy here is very focused on the long term, so shareholders need to be patient. If you already own shares, it would be a shame to panic-sell and lose your investment when the turning point could be just around the corner. If you are not a shareholder, this price makes the stock look very enticing. Just a word of caution: Although things could improve after a stellar fourth-quarter earnings report, it could just as easily take much longer, especially in this inhospitable market atmosphere.
