Lemonade Stock Has Plunged -- Is It a Buy Now?

Many high-growth stocks have been beaten down in the recent market downturn, but insurance technology company Lemonade (LMND 0.09%) has been hit harder than most. In this Motley Fool Live video clip, recorded on Jan. 27, Fool.com contributors Matt Frankel, Jason Hall, and Will Healy discuss if the stock is worth a closer look for patient long-term investors now.

Will Healy: Lemonade bills itself as insurance built for the 21st century. This is truly a different type of insurance company. The traditional insurer, they rely on very expensive salespeople who get paid commissions to sell their insurance. That's a very expensive and inefficient process. What Lemonade does is they make determinations based on artificial intelligence and behavioral economics.

This takes a more scientific approach, which is probably long overview because a lot of these financial businesses, they just, like you said, rely on expensive salespeople. There's not really much science to it. This changes that. Lemonade, renters, homeowners, pet insurance, life insurance. They just now got into auto insurance, too. They acquired Metromile (MILE), and Metromile is an interesting company because it determined insurance rates based on how much someone drove. Most of us deal with auto insurance, and you just pay a flat fee based on your car, how old it is, what county you live in, but this changes it up a little bit.

This is going to be interesting to people who don't drive a lot. To further attract consumers, they also budget a specific amount for claims. If they don't pay out those out, the remaining claims money goes to the charity of one's choice, so that there's also an altruistic aspect to this business model. Like I said, can attract customers. Usually they have a significant amount of money to contribute to this because in fiscal 2020, their gross loss ratio was 71%, so 29%. The other 29% went to the charities. However, you see in Q1 that that rose to 121%. I live in Texas and last winter rather, as you might remember, we had.

Jason Hall: Yeah, something happened. I think it was in the news.

Healy: Something happened. Yes, there was a rather significant ice storm and nobody had power. A lot of people had ended up with broken pipes and this caused, excuse me, this caused tremendous damages, and so that gross loss ratio temporarily spiked above 100%. But it's coming back down, in the latest quarter they've released, it's fallen back down to 77%.

If you're in insurance, these things are going to happen, even if it's somewhat natural disaster like what happened in Texas. You're going to have hurricanes, earthquakes, and such, so any insurer who's been doing this long term expects this. However, the stock is down more than 80 percent from its high. It had its high in February, right when that storm in Texas hit. I mean it was hit by that, and then it was hit somewhat by tech stock selling off, by the specter of rising interest rates. Investors tend to be less tolerant of high, what I'm I trying to say?

Expensive stocks when interest rates are rising, so it's understandable. But however, because of the massive drop, it's below its IPO price, and it's P/S ratio is now at 16, which is its lowest point in history. If we go to the chart, you can see how much it's dropped, whereas the S&P was up roughly 15%, yet we have 81% of this as of this morning. It trades at a significant discount. That said, it is running significant losses. It's going to be running losses for some time, I think, because it's basically still a start-up company and it's going to just take time.

But a lot of companies that eventually grew to the largest sizes were losing money for years. Amazon being an example. I'm not so concerned about this at this point, but the massive revenue increases, I think this is really going to take off. We're going to just have to see how things play out over time. It was tested by that ice storm in Texas, and now things are calming down, so just maybe it will grow again. I think it will, but of course time will tell.

Matt Frankel: I wanted to make two comments about Lemonade. You mentioned the Metromile acquisition, which a lot of people don't realize that is an all-stock deal. Lemonade, now that its stock price has fallen considerably, is actually buying Metromile for less than its cash on its balance sheet. It's just an incredible valuation they're getting on Metromile right now. The auto insurance by the mile model really struggled to gain traction there. But the real value is in the data that that auto insurance by the mile model generated. They're buying all these proprietary data for Metromile, essentially that should catapult their car insurance business.

And second, a lot of people don't realize just what you mentioned, Lemonade's still a start-up. A lot of people don't realize just how small the businesses is. I had their CEO on Industry Focus not long ago, and he said that their plan is, they think they can 100X the business in terms of premium generated and that would make them roughly a mid-level insurance company. That wouldn't even make them one of the leaders.

Hall: That's the thing.

Frankel: It's that small of a business right now. If their model works and it turns out they can get those loss ratios you mentioned under control, this is a huge potential opportunity.

Hall: I think people maybe don't really fully realize the value of the Metromile acquisition from another perspective, too, Matt, and that it's like rocket fuel. Rocket fuel for its Lemonade Car. Which I mean, it launched Lemonade Car like a month before it announced the acquisition, and now Lemonade, its path to getting licensed in 50 states, the District of Columbia, anywhere else that's a U.S. territory it wants to operate, potentially got a lot smoother. Again, assuming it gets regulatory approval in all the places it's going to need to do that. I mean, it could realistically shorten like it's getting into all of the markets that it wants to be in, by like five years. I mean, it really could make a big difference and really juice its growth in auto insurance.

Frankel: Metromile is licensed in 49 states.

Hall: Yeah. Right. That's it. There you go. It's really enormous. I'm curious, Matt, do you see any serious issues with getting approval for that Metromile deal? It seems like a pretty easy, straightforward thing.

Frankel: The only potential roadblock I could see is Metromile shareholders, which I haven't really looked into that much, being hesitant to sell the company for less than their net cash. That's the only roadblock I can really see from the Lemonade side.