Mobile-based insurance start-up Lemonade (NYSE:LMND), which targets millenials, has garnered a whole lot of attention lately. However, that attention has been centered more on the price action of Lemonade stock than on the company itself.
That’s a shame, as Lemonade (the company, not the stock) has the potential to disrupt the stodgy, traditional insurance market. There’s much to like about this company for investors who are open to new ideas.
Alas, the price action of Lemonade stock has deflected attention from what the company has to offer. That’s a symptom of the initial public offering (IPO) mania that’s gripped the stock market in recent years.
Sometimes I suspect that traders are buying up shares of new companies without doing due diligence on them. With that in mind (and please forgive me for my egregious abuse of puns), let’s indulge our desire for tasty IPOs with a look at Lemonade stock.
A Closer Examination of Lemonade Stock
Lemonade, whose rather ambitious stated mission is to “harness technology and social impact to be the world’s most loved insurance company,” debuted on the New York Stock Exchange on July 2.
in its brief existence, Lemonade stock has made quite a splash.The company first targeted $23 to $26 for its initial stock price and then raised its goal to $29. That, however, was a pittance compared to the stock’s actual performance.
If you can believe it, Lemonade’s shares opened at $50.06 and jumped by 132% in their first day of trading. On July 24, Lemonade stock closed at nearly $78, and this morning it’s hovering just above $70.
The stunning rally mostly occurred during the stock’s first few days of trading. For much of July, Lemonade stock repeatedly would reach its $80 resistance level and then fall back below it.
Like other recent IPOs, Lemonade is still in the process of achieving price discovery in the market. Consequently, I recommend avoiding the IPO mania and taking a small position in Lemonade stock, for those who want to take a position at all.
Insurance, Reimagined
By the end of March 2020, Lemonade had 729,000 active policyholders, representing $133 million of active premiums.
Moreover, Lemonade posted first-quarter revenue of $26.2 million. That’s a jaw-dropping 141% improvement compared to the same period a year earlier.
Clearly, Lemonade is a disruptor and a threat to old-fashioned insurance carriers. The company’s growth outlook is compelling, as open-minded millennial consumers now control a large amount of money. Soon enough, Gen-Z consumers will be in a similar situation.
Take a glance at Lemonade’s website before you invest in it. Note how it doesn’t have the boring, stock-image-riddled look of traditional insurance firms’ landing pages.
A Twist of Lemon
Yet, the difference between Lemonade and its competitors is more than just cosmetic. Lemonade offers renters, homeowners and pet-health insurance with a twist.
“Unlike any other insurance company, we gain nothing by delaying or denying claims (we take a flat fee!), so we handle and pay as many claims instantly as possible.”
Flat-fee premiums are a novel and worthwhile concept. Those who hold Lemonade stock for a long time are basically wagering that the firm’s business model can and will succeed.
The stock’s owners also need to believe in the idea that young shoppers will want to buy health insurance for their cats and dogs. Lemonade CEO and co-founder Daniel Schreiber certainly seems to think so:
“The US pet insurance market is valued at a couple of billion dollars, and with the increasing number of pet adoptions coupled with rising veterinary costs, we believe this market can grow rapidly.”
Schreiber’s point is well-taken, though only time will tell whether the pet-insurance market will gain traction in the coming years. Plus, it’s not yet known whether Lemonade will be the dominant player in this niche market.
The Bottom Line
If you’re going to buy and hold Lemonade stock, don’t do it because of the hype. Instead, own it because you truly believe that the flat-fee premiums model and the market for pet insurance are growth opportunities worth pursuing.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.
