Lemonade (NYSE:LMND) looks like a good investment in the medium term. But investors ought to wait for a pullback in Lemonade stock before pulling the trigger. In the longer term, the insurer could become a takeover target, although it will also face some important risks.
Lemonade has built several appealing characteristics into its business. First, according to the company, skimping on or denying claims doesn’t boost its bottom line to the same extent as other insurers. That’s because it donates the difference between its premiums and the amount it pays out in claims — with a ceiling of 40% of its premium revenue — to charities chosen by its customers.
However, it is interesting to note that Lemonade reportedly sells 75% of its premiums to reinsurers. It does so in exchange for a fee equal to 25% of the total premiums. Regardless, the fact that Lemonade has less incentive than its competitors to deny or shortchange claims is likely a great selling point.
Another important selling point is its fast, no-hassle service. According to a Seeking Alpha columnist, Lemonade’s “customers can file claims by chatting with AI bots, and they can receive claims only in three seconds.”
CNBC’s Jim Cramer says that the chatbots are great for millennials. Why? Because the members of that generation “hate talking to a human being.”
But I’m in an older generation. And when it comes to fairly simple tasks like signing up for a service or submitting a claim, I’d rather deal with a computer program. That’s because computers usually ask fewer questions and work more quickly than humans. So I believe that Lemonade’s approach is probably appealing to a majority of Americans.
Lemonade Looks Headed for Profitability
The company’s gross written premiums surged from $9 million in 2017 to $116 million in 2019. Its net losses per dollar of gross written premiums plunged from $3.12 in 2017 to just 94 cents in 2019.
Further, the Seeking Alpha columnist pointed out that the insurer’s “revenue growth rate is much higher than [its] expense growth rate, indicating the high probability of generating profits in the next several years.” I agree with that assessment.
Are you still not convinced? Think about this. Lemonade now focuses on selling homeowners’ and renters’ insurance, but it has said that it would begin selling other types of insurance. In fact, the company recently announced that it would begin offering health insurance for pets.
As the insurer starts offering other types of insurance, it will likely not have to increase its marketing or administrative spending a great deal. However, its revenue will jump tremendously.
Longer-Term Risks
Over the long term, other insurers could begin copying Lemonade’s approach. They could start using AI -driven bots to a greater extent and donating a portion of their premiums to charity. Still, Lemonade has a first-mover advantage when it comes to using those techniques.
Moreover, based on the rapid growth of the company’s premiums, consumers seem to have already developed some loyalty to the insurer.
Given these points, I wouldn’t be surprised if Lemonade became a takeover target within a couple of years.
The Bottom Line on Lemonade Stock
Now may not be the best time to buy the shares. Lemonade stock has nearly tripled since its IPO earlier this month. And in the broader markets, good news about novel coronavirus vaccines is causing a stir.
Therefore, it may be best to wait for a pullback to the $65-$70 range before pulling the trigger. At that point, the shares look like a good bet for those looking for a low-risk play on increases in millennials’ homeownership rates over the next 12 to 18 months.
As of this writing, Larry Ramer did not own shares of any of the aforementioned stocks. Larry has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful, contrarian picks have been Roku, oil stocks and Snap. Larry began writing columns for InvestorPlace in 2015. You can reach him on StockTwits at @larryramer.
