Shares of Lemonade (LMND 2.20%) sank a whopping 40% in February, according to data from S&P Global Market Intelligence. The high-flying insurer, trying to disrupt the legacy market, posted fourth-quarter earnings that disappointed investors. Shares of the stock are still up close to 70% in the last year, marking a huge run for Lemonade shareholders.
Here's why the stock sank in February, and whether now is a good time to buy the dip for your own portfolio.
NYSE: LMND
Key Data Points
No profits and a premium valuation
Lemonade has sought to disrupt traditional consumer insurance markets, such as renters, home, and car insurance, through an easy-to-use online platform. With lower overhead costs, the company believes it can offer insurance rates lower than the competition's and still generate profits.
So far, it has been able to use its lower pricing to drive customers to its services. In-force premiums -- a topline metric for an insurer such as Lemonade -- totaled $1.24 billion last quarter, up 31% year over year. More customers are joining Lemonade for its various insurance offerings, driving strong topline growth.
The problem is, the company is failing to turn this premium into a profit, with a net loss yet again in Q4. Management claims this is due to its reinvestments for growth, but investors are nervous that it is gaining market share without actually building a sustainable insurance operation.
What's more, Lemonade's valuation was high going into the Q4 earnings report, with a price-to-book value (P/B) of 14. This is the best metric for valuing an insurance operator, and it was quite the premium. Lemonade still trades at a P/B of 7.9 as of this writing.
Image source: Getty Images.
Time to buy Lemonade stock?
After falling 40%, Lemonade trades at a cheaper, but still not cheap, P/B of 7.9. The company has consistently destroyed book value by losing money over the years, but last quarter it stemmed the tide, with book value per share flattening instead of declining. If this were to reverse and the company starts generating excess capital, perhaps the business will start generating value for shareholders.
Lemonade is a fast-growing business, and if it can keep up this fast growth and exhibit some levels of operating leverage, the stock might be a buy today. However, shares still trade at a premium vs. the rest of the insurance market. For example, Progressive trades at a P/B of 4.1, and it is the best operator in the industry. Lemonade remains a risky stock to add to your portfolio right now.
