The current bull market has been driven by huge artificial intelligence (AI) stocks like Nvidia and Palantir Technologies. But even though the S&P 500 is up 16% year to date, and the tech-heavy Nasdaq 100 is up 22%, not all stocks are uniformly loved on Wall Street.
Consider Lemonade (LMND +6.74%). Lemonade stock is up 214% over the past year, but 42% of covering analysts say to sell. What's going on here?
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AI is coming for your insurance
Lemonade sells insurance backed up by an artificial intelligence model. It uses digital tools throughout its enterprise, such as having chatbots to onboard new customers as well as service policy claims. Since it was built on a digital substrate, it's quick and agile, and as it gets more customers, policies, and data points, its algorithms are becoming highly accurate.
The market has been embracing Lemonade as it reports quarter after quarter of high growth and improving profitability, and the third quarter was another blowout. Here are some highlights:
- In-force premium (IFP), a metric insurance companies use as their top line, increased 30% year over year
- Customer count increased 24% to nearly 2.9 million
- Adjusted free cash flow was $18 million, down from $38 million last year
- Loss per share was $0.51, up from $0.95 last year
There was much to love about the quarter and even more to love about the business. Lemonade uses AI to gain insights and for automation, plus more tasks, leading to greater efficiency. Although marketing spend is increasing, it's able to pinpoint where and how to spend, increasing conversions and padding the top line. But because it can rely on AI to handle a lot of the load, rather than needing to invest in costly labor, operating expenses outside of marketing have remained roughly flat. That's leading to scale and helping it get closer to profits.
Gross margin has more than doubled from 19% two years ago to 41% in the 2025 third quarter, and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) narrowed from a $49 million loss last year to a $26 million loss this year. Management expects adjusted EBITDA to turn positive in 2026, and generally accepted accounting principles (GAAP) profits are in clear sight. Lemonade expects to hit that important milestone in 2027.
NYSE: LMND
Key Data Points
The loss ratio is stable and declining
Insurance companies use the loss ratio, which demonstrates how much of a policy is paid out in claims, as an important measure of performance. It took some time for Lemonade's algorithms to kick in and get this part right, which makes sense considering how young the company is and how fast it's growing. It has been trending lower for a while now, and the gross loss ratio hit 62% in the third quarter, down from 73% last year. It came in at 67% for the trailing 12 months.
The loss ratio typically gets lower as a product is around longer, and homeowners insurance, the company's oldest product, had a 51% loss ratio in the quarter. That should inspire confidence that the company can keep lowering it for all of its products as they mature.
The massive opportunity
The third-quarter results were more than a signal that it can get to profitability. As it captures more customers, it has a huge opportunity ahead.
It's still rolling out its car insurance product in new markets, and Car represented 40% of its growth in the third quarter. Even better, about half of new Car policies came from existing customers, meaning that they required no customer acquisition costs. Its bundling strategy should reap more rewards as it offers more products in more places.
What in the world is Wall Street thinking?
The market is wild about Lemonade, but Wall Street isn't, although some analysts may change their ratings and price targets after the earnings report.
There is definitely some risk involved in buying Lemonade stock, since it isn't profitable yet, and it's susceptible to natural catastrophes that weigh on its loss ratios. But as its underwriting models improve, it takes these events into consideration. And when it does become profitable, it's likely to get to a scale where one-time events don't have such a strong impact.
Lemonade stock has also become quite pricey as it soars. It's still nowhere near as expensive as it once was, but today it trades at a price-to-sales ratio of 11.
I think investors have to take a gargantuan grain of salt with Wall Street's majority opinion here, and keep in mind that not all analysts are in the sell camp. Investors that have a long time horizon can buy Lemonade right now. The stock should reward investors over time, and a dollar-cost-averaging strategy could benefit from more attractive entry points.
