By applying a tech-first approach to a massive legacy industry like insurance, Lemonade (LMND 1.64%) is catching on with customers who simply want a better user experience. This has resulted in impressive growth for the company, so it's not hard to see why the business might be on the radar of many investors looking for rapid gains.
If buying this fintech stock is a real consideration, it's best to take the time to learn more. Here are four things even the smartest investors should know about Lemonade.
1. A losing investment
To say that Lemonade's stock has gotten crushed would be an accurate statement. As of this writing, shares are 93% off their peak price set in January 2021. Even this year, when the Nasdaq Composite Index is up 31%, the insurance stock has declined 8%. It's discouraging that Lemonade hasn't even participated in the broader market's rally in 2023.
This has been a losing investment since the company's initial public offering in June 2020. At the time, fintech stocks were getting a lot of love from Wall Street. The pandemic only helped to boost this enthusiasm. But in recent times, negative macro factors like above-normal inflation and high interest rates are pressuring the stock. Investors don't seem as interested in speculative businesses as they were a couple of years ago.
This means Lemonade's stock is dirt cheap right now, ang it carries a price-to-sales multiple of 2.4. That's significantly below its historical average of 25.3.
2. Focus on artificial intelligence
The business offers various insurance products to customers in a purely digital format, without brick-and-mortar locations or sales agents. Moreover, artificial intelligence (AI) and machine learning are at the foundation of everything Lemonade does. It has numerous models that help it analyze data points to better underwrite risk. The tech platform says that customers can sign up for a policy in as little as 90 seconds and get a claim paid out in as little as three minutes.
For investors looking to invest in the AI craze, Lemonade might deserve a closer look. That's because it's been working on this revolutionary technology ever since its founding in 2015, with a clear real-world use case.
3. Giveback model
Besides utilizing AI to operate a direct-to-consumer insurance model that's purely digital, Lemonade also stands out due to its charitable focus. Like a traditional insurer, Lemonade collects premiums and pays out any claims. But what's different is that a portion of what's left after these claims are settled goes to a charitable organization of the customer's choice. In fact, Lemonade is a certified B corporation, which means that it meets certain standards as it relates to taking care of other stakeholders besides just investors.
In our capitalist society, some might view this as a breath of fresh air. It indicates that management's focus is also to do good for the world. The business has given more than $8 million to non-profit organizations since 2016.
4. Where are the profits?
Like many other early stage tech stocks, Lemonade's growth has been impressive. Revenue in the second quarter rose 109% from a year earlier to $105 million. The customer base jumped 21% to 1.9 million. These are strong gains given the macro environment, and they are much higher than just three years ago. That shows Lemonade's offerings are catching on.
However, achieving profitability remains a challenge. Lemonade posted a net loss of $67.2 million in Q2. This is about the same as in the year-ago period despite rapid top-line growth.
The leadership team thinks that if it can get the gross loss ratio --a key metric for insurance businesses that compares claims paid out versus premiums collected -- closer to 70%, then positive net income will become a reality. The problem is that this number came in at 94% last quarter, worse than the 87% level in the first three months of 2023.
Lemonade's growth is notable, but investors have probably been punishing the stock because of the lack of progress on the bottom line.
