What happened
Shares of Lemonade (LMND 12.97%) were turning sour today after the insurtech company got an analyst downgrade from Morgan Stanley.
The bearish commentary was enough to push the stock down 9.6% as of 2:29 p.m. ET, putting the brakes on its recovery this year.
So what
Morgan Stanley analyst Bob Huang initiated coverage on Lemonade this morning with an underweight rating, saying the path to profitability remains challenging, and investors can find better risk/reward trade-offs elsewhere on the market as Lemonade trades at an enterprise value-to-revenue multiple of 3, making it expensive considering it's still reporting substantial losses. Huang also gave the stock a price target of $14, implying a 29% decline in the stock based on its closing price on Friday.
The note threw cold water on what had been a major rally in the stock in recent weeks after a better-than-expected first-quarter earnings report and as artificial intelligence (AI) stocks rose broadly, helped by blowout guidance from semiconductor sensation NVIDIA.
Lemonade uses artificial intelligence in a wide range of ways, including as a chatbot to enroll new customers, give quotes, process claims in as fast as a few minutes, improve its underwriting, and prevent fraud.
Now what
Even after today's sell-off, Lemonade stock is still up 64% since the beginning of May. Its first-quarter earnings report showed that the company is still growing fast and improving its loss ratio, and it has a lot of potential for expansion in new states and in new categories like pet insurance and auto insurance.
While the company's disruptive potential is far from assured, Lemonade is gaining market share and making progress on its goals. Still, as Huang points out, profitability has to improve significantly before investors can trust any gains from the stock will be lasting.
