What happened
Shares of fintech stock Lemonade (LMND 1.64%) slumped 20.3% in the last month, according to data from S&P Global Market Intelligence. The company reported earnings on Feb. 23, but other market factors had larger effects on the stock's price.
So what
Lemonade's earnings report revealed strong revenue growth, but its outlook fell short of Wall Street's expectations. The company also reported a relatively high loss ratio, which is discouraging. That's a recipe for disaster in today's market. However, the stock recovered from an initial sell-off and actually rose 8% between the earnings release and through the end of the month. Clearly, there's something else going on.
Image source: Getty Images.
Lemonade had already dropped nearly 30% in February prior to its earnings report. That suggests that capital flows are creating volatility that is beyond the company's control. See this chart comparing Lemonade, another popular fintech stock, Block (SQ 2.32%), and the UltraPro QQQ ETF (TQQQ 4.60%), which triples the Nasdaq's performance.
LMND, SQ, TQQQ data by YCharts
Lemonade dropped along with the other stocks, even though there was no major news for the company. Then it rebounded partially in the last week of the month, despite reporting lukewarm forecasts. Much of Lemonade's high volatility is down to the fact that it's an unprofitable company that came into the year with an aggressive price-to-sales ratio above 23.
Its association with Bitcoin (BTC -1.16%) may also play a role, similarly to Block. The insure-tech leader purchased $1 million worth of Bitcoin last September and publicly disclosed the purchase in December. Stocks associated with cryptocurrencies have experienced excess volatility in recent months as the crypto markets continue their wild ride.
Now what
Lemonade is still an exciting disruptor in the insurance industry. It reported 43% growth in total customers to 1.4 million in the most recent quarter. Premium per customer rose by 25%, so it's doing a better job of monetizing users that get into its funnel. Lemonade's 9.7 price-to-sales ratio indicates a much more attractive entry point than it was about one year ago -- that valuation ratio was over 90 in early 2021.
If the Bitcoin purchase is causing volatility, then that issue is probably overstated, too. Lemonade has $800 million in short-term assets on its balance sheet, so that $1 million portion is a drop in the bucket.
With all that said, it's become clear that Lemonade's actual financial performance isn't enough to fight the tides of market dynamics right now. If growth stocks continue to drop, Lemonade is likely to get hit even harder than major indexes. If you love the stock, then make sure you're ready to hold for the long term.