Lemonade (LMND 7.21%) has been developing artificial intelligence (AI) since 2015, long before the technology captivated Wall Street a couple of years ago. The company is using AI to transform the insurance industry by writing quotes in seconds, and paying claims in minutes instead of days or weeks.
Lemonade has attracted over 2.5 million customers so far across its homeowners, renters, life, pet, and car insurance products, and the company has outlined a plan to grow its business tenfold over the next decade.
Lemonade stock is down 75% from its record high set during the tech market frenzy in 2021. It was unquestionably overvalued back then, but it's now trading at an attractive level in light of the company's growth and its future potential. Here's why the stock could be a great addition to any diversified portfolio right now.
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A new way to buy insurance
Most traditional insurance companies have cumbersome processes, especially when it comes to claims. But Lemonade's AI-powered approach prioritizes automation, which ensures a fast and convenient customer experience. The company's AI chatbot, Maya, can provide an insurance quote in under 90 seconds via the Lemonade website, and for existing policyholders, AI Jim can settle claims in less than three minutes.
Lemonade also uses AI to calculate the most accurate premiums, which can save customers a significant amount of money over the long term. The company's lifetime value models use AI to predict the likelihood of each policyholder making a claim, switching insurers, and buying multiple policies. These models also assist with operational duties like marketing by identifying underperforming products or geographic locations so management can make strategic adjustments to maximize revenue.
In the third quarter of 2024 (ended Sept. 30), Lemonade highlighted some of the benefits of its AI approach. The company grew its in-force premium (IFP) by 24% year over year during that quarter (which is the value of premiums from all active policies) while reducing its workforce by 7% at the same time. In other words, Lemonade is bringing in more money per employee thanks to automation.
In fact, the value of the company's IFP divided by its employee headcount more than doubled between the end of 2021 and the third quarter of 2024.
Fast-forwarding to the recent first quarter of 2025 (ended March 31), Lemonade's IFP surpassed $1 billion for the first time. It represented a year-over-year increase of 27%, and it was the sixth consecutive quarter in which the growth rate accelerated, signaling serious momentum in the business.
Lemonade is on track for a record year
During the first quarter of 2025, Lemonade's trailing-12-month gross loss ratio held steady at 73%. This is the proportion of premiums paid out as claims, and management believes the secret to a thriving insurance business is to maintain a gross loss ratio of below 75%, so the company is right on track.
A growing IFP with a steady gross loss ratio translates to more revenue. After accounting for the premiums Lemonade paid forward to other insurers to reduce risk, its revenue came in at $151.2 million during the first quarter, which was a 27% jump from the year-ago period. The figure was above the high end of the company's forecast of $145 million, prompting management to increase its full-year revenue guidance. Lemonade is now expected to bring in $662 million (at the midpoint of the forecasted range) compared to $656 million previously.
That would be a 26% increase from Lemonade's 2024 result, and it would also be a record amount of annual revenue. But it gets better, because management expects IFP growth to accelerate to a compound annual rate of 30% going forward, which would be a major tailwind for revenue.
Management actually predicts IFP will hit $10 billion over the next decade or so. To achieve this, Lemonade plans to lean more heavily into its AI-powered approach to improve the customer experience even further and to optimize for profitability, which means targeting the most lucrative insurance markets. The car insurance market is one of them, and it could drive the company's next phase of growth.
Lemonade stock looks cheap relative to its history
When Lemonade stock peaked in 2021, its price-to-sales (P/S) ratio soared to around 100, which was a completely unsustainable level. However, the 75% decline in the stock since then, in combination with the company's revenue growth, has pushed its P/S ratio down to just 5.2 as of this writing (June 16). That's near the cheapest level since Lemonade went public:
LMND PS Ratio data by YCharts
If Lemonade grows its IFP to $10 billion over the next decade, its current stock price will almost certainly look like a bargain when investors look back on this moment. But there is one caveat: Scaling an insurance business isn't cheap, and Lemonade continues to lose money.
During the first quarter of 2025, Lemonade lost $47 million on an adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) basis, which is management's preferred bottom-line metric. That loss was up 38% year over year, but it was primarily due to the effects of the California wildfires, which had a $22 million impact on Lemonade's bottom line during the quarter.
The good news is that apart from the occasional blip, the company's losses have mostly trended lower for the last couple of years. Management thinks adjusted EBITDA profitability might even be on the table by the end of 2026, which would make Lemonade stock more attractive from a risk perspective.
With that said, I think investors are being compensated for any known risks because of Lemonade's current valuation. Those who are willing to buy the stock today and hold it on the journey to $10 billion in IFP could reap significant rewards.
