No hot topic has rattled the minds of investors in recent times quite like artificial intelligence (AI). With the impressive rise of companies like Nvidia and Super Micro Computer, as well as the continued dominance of heavy hitters like Alphabet, Meta Platforms, and Microsoft, investors are certainly intrigued.
Besides large corporations, under-the-radar companies can also give investors exposure to what many believe is a revolutionary technology. This beaten-down fintech stock might be one such business. Is it a no-brainer buy right now?
Doing AI for a long time
It's interesting to see which companies are simply hopping on the AI bandwagon versus those that have been working on this tech for quite some time. Lemonade (LMND +3.59%) fits into that latter category.
Since its founding in 2015, the business has focused on utilizing AI and machine learning (ML) to better analyze risk and serve customers in the insurance industry with renters, homeowners, auto, pet, and life insurance offerings. In fact, Lemonade uses 50 different models "every single time any prospective customer comes to our sites."
So it makes sense that the company can approve new policyholders or pay out claims in minutes. By not having a network of physical branches or a team of sales agents, Lemonade is truly aiming to disrupt the insurance market with a tech-first approach.
Beating Wall Street estimates
Lemonade gave its shareholders reasons to cheer when it reported financial results for the first quarter of 2024. Revenue of $119 million and a per-share loss of $0.67 both beat Wall Street estimates.
Investors should pay attention to other key metrics, though, especially those that demonstrate the growth of this business. In Q1, Lemonade's numbers of in-force premiums and customers jumped 22% and 13%, respectively, a clear indication of how well the company's offerings are resonating with consumers.
For insurance companies, the gross loss ratio is a critical number because it measures the percentage of premiums that get paid out in claims. Lemonade's gross loss ratio came in at 79% last quarter. That's still not at the leadership team's target of 75%, but it appears to be heading in the right direction; last year's figure was 87%. It's important to realize that the gross loss ratio experiences seasonality, and weather-related incidents are a main factor.
NYSE: LMND
Key Data Points
Why I'm not a buyer
As of this writing, shares of Lemonade are down 90% from their peak, which they hit in January 2021. Consequently, the stock trades at a price-to-sales ratio of 2.9. Shares have rarely been cheaper.
However, despite the company's longtime focus on AI, coupled with solid growth and a compelling valuation, I'm still not buying the stock for two main reasons.
The first has to do with just how competitive the insurance industry is. Any company in the financial services sector has to deal with numerous rivals, all trying to draw in customers with what are largely commoditized products. This is certainly also the case here.
Moreover, the insurance market is home to some true giants, like State Farm, Berkshire Hathaway's GEICO, Allstate, and Progressive, that all have been focused on strengthening their digital foundations. This setup won't make things easy for Lemonade.
The other reason I'm not adding shares to my portfolio is that Lemonade has yet to achieve profitability.
Even so, management certainly deserves credit for being able to gradually lower that gross loss ratio over the past couple of years. This might be a clear sign that Lemonade's AI and machine learning capabilities are getting better at underwriting risk. However, it's anyone's guess when the business will start consistently generating positive net income.
Until a company can get to this point, there is added financial risk for investors. I'd like to avoid that risk.
