Despite the many trials and tribulations associated with the novel coronavirus, upstart insurance provider Lemonade (NYSE:LMND) remains a compelling idea. For one thing, there’s evidence to suggest – and I’ll dive into the details later – that the insurance industry is resilient. That’s great news for Lemonade stock, as it faces serious questions about viability in the face of an economic crisis.
While the worrying backdrop is an element we can’t ignore, it’s also fair to point out the obvious: in an increasingly complex world, it pays to have insurance. For a relatively modest cost, providers offer peace of mind. In my opinion, that’s worth paying for, even with this unprecedented crisis.
Further supporting the case for Lemonade stock is the underlying disruptive business. Rather than employ an army of corporate bureaucrats and risk assessors, Lemonade relies heavily on artificial intelligence. Through an intuitive app, prospective clients can get insured within 90 seconds. On the other end, claims are paid out in three minutes, according to the company’s website.
By cutting out the middlemen within the insurance architecture, LMND is able to offer renters, homeowners and pet health insurance for rock bottom rates. And that’s why people have jumped ship from insurance giants like Allstate (NYSE:ALL) and Travelers Companies (NYSE:TRV) to Lemonade.
Better yet, the company delivered a solid performance for its second-quarter earnings report, paring an expected per-share loss and generating revenue of $29.9 million, up nearly 117% from the year-ago quarter, while also besting consensus by $590,000.
But following the disclosure, Lemonade stock dropped sharply. Although shares have since returned to a bullish trajectory, should investors be concerned about a potential warning sign?
Lemonade Stock Is in Good Hands
Though the headline earnings print was optimistic, Lemonade’s management team didn’t quite live up to expectations for third-quarter estimates. LMND guided Q3 revenue to between $14 million to $15 million, a hair shy of the $15.2 million consensus target. For the full year, the insurance provider expects top-line sales between $86 million to $88 million, again falling just short of the $88.9 million consensus target.
In the big scheme of things, the Q2 report and Q3 forecast miss probably won’t impact Lemonade stock that much. Presently, what most investors are concerned with is the longer-term viability of LMND. With the nation still reeling from the coronavirus devastation, can Lemonade survive in this troubled environment?
According to S&P Global Market Intelligence, stakeholders of Lemonade stock can at least assure themselves that they’re in a robust industry. Generally, insurance companies fared well during the Great Recession. And while we may face economic turmoil in the months ahead, experts believe that this sector can hold up. In part, that’s because there are “not as many systemic imbalances as there were during the financial crisis in 2008.”
Further, that LMND is poaching clients from Allstate and Travelers is a huge positive for Lemonade stock. Between 1994 and today Allstate and Travelers averaged year-over-year returns of 12.3% and 10.5%, respectively. In contrast, the average return of the S&P 500 index over the same period is 8.3%.
It’s very possible that Lemonade stock could exceed these average returns over the next several years. Primarily, the underlying company is relevant to millennials, which represent the largest working demographic in the U.S. Additionally, the Lemonade platform is accessible and simple, with its flat fee.
Finally, whatever money is left over is given to causes clients care about.
But Is a Narrative Good Enough?
Undoubtedly, Lemonade is a brilliant concept. In a parallel universe, this would be the time to go public with such a business. With the convergence of technology and millennial culture, LMND would ordinarily be a no-brainer.
Sadly, there’s a little thing called the coronavirus that worries me. More to the point, it’s the economic pain resultant from the pandemic that gives me pause.
As you know, millions of Americans face eviction risks through no fault of their own. With federal and state authorities urging them to shut down and stay indoors, of course their livelihoods have been turned upside down. But then, adding insult to injury, Congress skips town for vacation while families suffer.
Words can’t describe how utterly pathetic our elected officials are. That they can look themselves in the mirror without feeling any shame is the true mystery here.
While I love the business and the disruptive potential, I must take a cautious approach. With so many unknowns and a deadbeat Uncle Sam, I believe waiting is the best tactic.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.