Lemonade Stock Is Not As Tasty As It Looks

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Lemonade (NYSE:LMND) owns and operates an AI-based (artificial intelligence) platform that markets casualty, property and pet insurance. The company focuses mostly on homeowners insurance and specifically targets millennials. And LMND stock has caught the attention of investors with new highs after its initial public offering (IPO).

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It is a well-known fact that millennials today are not particularly keen on visiting physical offices to complete daily tasks or errands. When it comes to buying insurance, Lemonade has carved out a niche in the industry that meets the desires of these millennials. But that also means that they have excluded a large part of the population that likes options — the option of visiting a physical insurance office or speaking to an agent has been eliminated with Lemonade.

Technology, therefore, is clearly an important part of the framework of the company. There are AI and chatbots to help make purchases and file claims instead of agents. And this approach does seem to be at least somewhat working. The company hit one million active users within a period of five years, while several other insurance companies have taken about 15 years to hit the number.

The fundamentals of the company speak a lot about its future prospects. I will let the numbers do the talking here. The company released Q3 results with revenue of $17.8 million. It generated gross profits of $7.3 million, which is up 83% year-over-year. Net losses were down slightly at $30.9 million, as compared to $32.1 million in the same quarter last year. The company is expanding, but competition is intense and profitability is not on the horizon. 

LMND Stock Is Riding the IPO Wave

Despite the strong financials and high market share, I think the stock is overvalued. You must consider whether the stock will go any higher from this point. Lemonade went public in July at $29 per share and hit $69 on the first day. It then hit a low of $44 in September, but took off in December. It is trading at $180 today. The stock has touched an all-time high and has caught the attention of investors.

A lot of companies see their stocks skyrocketing following their initial listing, and the case is the same with LMND stock. This is an IPO “pop,” and investors should let it cool down. This pop shows a possibility that the company had underpriced the shares, meaning it raised less money than it could have.

Another possibility is that there are investors who get an allocation from the underwriters and enjoy outsized gains. Either way, it is not fair play. However, this is not the only factor to consider.

As Good As It Looks?

LMND is targeting millennials, and in unprecedented times like today, it is hard to say if the company will be able to attract more customers. High asset prices, social unrest, low investment options and lack of spending opportunities can all slow down the momentum. Further, Lemonade is heavily dependent on reinsurance for its business. There is nothing wrong with that, but with complete reliability on reinsurers, the excessive profits will also pass on to the reinsurer.

Additionally, the company offers “instant everything,” as they claim on the website. They also pay claims super fast, checking them within minutes and clearing them. Does this mean that they won’t deny claims? This can invite fraud, and if the claims are checked in a couple of minutes without an adjuster or a representative, then the company is giving out the wrong message.

The super fast claims and “instant everything” does not seem convincing to me. More than anything, it seems difficult. The company looks overvalued at this point. InvestorPlace contributor Larry Sullivan agrees with me, saying that you will be paying too much if you buy the stock now. The current valuation is crazy given that the company has no net profit, net income or free cash flow, and it is not expected to have a positive net income for the next year, at least. 

LMND stock may look tasty right now, but it is best to wait for a dip before you add it to your portfolio. 

On the date of publication, Vandita Jadeja did not have (either directly or indirectly) any positions in the securities mentioned in this article.

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