What happened
Wall Street is increasingly souring on Lemonade (LMND 7.99%), and investors are taking notice. Shares of the insurance newcomer fell by as much as 5% on Friday after the stock was initiated by an analyst with an underperform rating.
So what
Lemonade is a one-time fintech wonder that has fallen on hard times of late. The company went public in 2020 with a mission to disrupt insurance sales by making the business more customer-focused, but it has been an uneven performer in what has become a treacherous market for young companies.
The stock has lost more than half of its value in the last year. BMO Capital analyst Michael Zaremski sees more difficulty up ahead. The analyst initiated coverage on Lemonade with an underperform rating and a $10 price target.
Zaremski notes that Lemonade's current gross expense ratio is significantly higher than its peers, and says the company is much more reliant on reinsurance than its competitors are. Should losses mount in a challenging economy, it could be harder for Lemonade to get the reinsurance it needs in the quarters to come.
The analyst's warning comes just days after Piper Sandler (PIPR 2.71%) analyst Arvind Ramnani lowered his price target on Lemonade to $19 from $20. Ramnani remains optimistic about Lemonade's product, but says 2023 is likely to be a transition year as the company focuses on cross-selling insurance products and boosting profitability.
NYSE: LMND
Key Data Points
Now what
Lemonade in its brief history has proved there is a market for more user-friendly insurance sales, and as the company scales up its auto insurance business in 2023, there is significant opportunity for growth. The question is whether it can translate that growth into profitability, and a lot of that will come down to how well the company does at evaluating risk.
The frustrating truth is that there is no way to answer that question right now. If Lemonade can show progress in improving profitability in 2023, the stock appears extremely undervalued at this moment. But until it does demonstrate that progress, there is significant risk to owning the shares.
For long-term investors who believe in the promise, Lemonade can be a speculative part of a well-diversified portfolio. But those who buy it need to understand the risk, and be prepared for further volatility.
