Lemonade(NYSE: LMND) has been anything but sweet to its shareholders. The artificial intelligence (AI)-powered insurance business is aiming to disrupt the industry. But as of this writing, its share price sits more than 80% off its peak, which was reached in January 2021.
Lemonade has soared more than 70% since it reported well-received Q3 financial results on Oct. 30 (as of Nov. 14). Is this fintech stock a buy, sell, or hold right now?
The case for buy and hold
One of the top reasons investors might gravitate toward this stock is because it has long been focused on AI, well before this technology became the hottest buzzword. It seems any and every business tries to mention AI in their earnings calls or marketing campaigns to draw the interest of Wall Street. In comparison, Lemonade, founded in 2015, was built around AI from the ground up.
The company uses data, AI, and machine learning to offer insurance products directly to consumers. It can onboard new policyholders in 90 seconds, while paying out claims in minutes. This seamless user experience has attracted a younger customer base.
Lemonade is experiencing strong growth, and most recently reported financial results that pleased the market. In the third quarter, the customer count and in-force premiums rose 17% and 24%, respectively, year over year.
There's still a sizable growth runway that Lemonade is staring at. The insurance industry is huge, with global premiums (property, casualty, and life insurance) totaling in the trillions of dollars. And the industry is highly fragmented. Bringing on young customers and providing insurance as they go through life is still the company's key growth strategy to capture this opportunity.
Existing Lemonade shareholders should continue holding the stock because of the company's strong quarter and its growth potential, which are probably key reasons the business is already in your portfolio. I don't think the story has changed in this respect for shareholders.
However, something that might turn off new buyers, but that might actually not be a deal-breaker for current shareholders, is the valuation. As of this writing, Lemonade trades at a price-to-sales ratio of 4.6. This isn't a bargain-basement valuation, so it likely won't be too compelling to many investors. But it's also not in nosebleed territory, which means the valuation isn't a reason to dump your shares right now.
Why you should sell Lemonade
Despite positive traits, there are still reasons to avoid or even sell this stock. One main area of concern is the lack of profit.
On the one hand, this is understandable, with the business aggressively focusing on product development and customer acquisition. But on the other, it's a sign that Lemonade's model is unproven. During the past nine months, the company reported a total net loss of $172.2 million. The hope is that with greater scale, the company's bottom line can get into the black.
There's also immense competition in the insurance industry. Yes, Lemonade has won over customers by providing a great user experience. But the incumbents have all been investing aggressively in their own digital and AI capabilities. This diminishes the advantage Lemonade has, especially since the legacy companies have greater resources.
I'm also not the biggest fan of the company's B-Corp status, meaning the company is certified as having a social or environmental mission along with making money. As I see it, if a business really wanted to be a force for good in the world, it would focus intensely on creating superior products and services that the world really needs at costs that are compelling to customers. It's that simple. It's not a stretch to believe that the B-Corp designation could be a marketing ploy.
Lemonade deserves credit for what it has accomplished thus far. And its strong growth is admirable. But I think the stock should be avoided.
I don't believe Lemonade has an economic moat right now signaling that it has a competitive advantage. Moreover, the business isn't profitable. Over time, Lemonade might fix these two concerns. It's not there right now, though, and it's not certain that it ever will be.
Don’t miss this second chance at a potentially lucrative opportunity
Ever feel like you missed the boat in buying the most successful stocks? Then you’ll want to hear this.
On rare occasions, our expert team of analysts issues a “Double Down” stock recommendation for companies that they think are about to pop. If you’re worried you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:
- Amazon: if you invested $1,000 when we doubled down in 2010, you’d have $23,818!*
- Apple: if you invested $1,000 when we doubled down in 2008, you’d have $43,221!*
- Netflix: if you invested $1,000 when we doubled down in 2004, you’d have $451,527!*
Right now, we’re issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.
*Stock Advisor returns as of November 11, 2024
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lemonade. The Motley Fool has a disclosure policy.
