Lemonade Stock Is Being Served Very, Very Sour

Investors are always on the lookout for the next big thing in the market. But when it comes to Lemonade (NYSE:LMND), today’s shareholders need to be prepared for a sour experience until a better mix is served off and on the Lemonade stock price chart. Let me explain.

The Lemonade (LMND) website is displayed on a smartphone screen.
Source: Piotr Swat / Shutterstock.com

Led by Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT) and Amazon (NASDAQ:AMZN), the market has hit multiple all-time highs and, impressively, done so against the backdrop of the Covid-19 pandemic. To say it has been an amazing run is an understatement.

Even burlier gains and historic feats from today’s trillion-dollar-plus tech giants have also undoubtedly left many chasing performance and looking for the next big idea on Wall Street. But if investors are set on finding tomorrow’s Apple, Microsoft or Amazon from today’s crop of ground-floor opportunities, I’d warn against buying Lemonade as an answer to that challenge.

So, what or who is Lemonade?

Lemonade is a property and casualty insurer.

When compared to today’s fast-action EV theme led by Tesla (NASDAQ:TSLA), biotechs in the race for coronavirus fighting vaccines or high-flying SPACs such as DraftKings (NASDAQ:DKNG) or Virgin Galactic (NYSE:SPCE), Lemonade sounds like a boring investment from a bygone era. Though it’s not actually as boring as all that. After all, Lemonade is using AI or artificial intelligence for a fintech angle on a staid industry.

Lemonade’s aim is to utilize its AI-driven platform to disrupt old school competition from Progressive (NYSE:PGR), Allstate (NYSE:ALL) or Berkshire Hathaway’s (NYSE:BRK.B) Geico. You know, the companies busy making cute commercials.

In a nutshell Lemonade is going after the mobile-first Millennial market as it reimagines a legacy business for a world upended by digital and societal revolutions. More specifically, it’s looking to leverage today’s technology, cause positive social impact, as well as fatten customers wallets to become the world’s most loved insurance company. Watch out Flo, Mayhem, and lizard guy!

But as tempting as Lemonade may sound, today’s company has challenges other than memorable branding from its competition. Namely, Lemonade stock is expensive. The shares are facing losses for the foreseeable future. Lemonade also sports a highly uncompetitive 33x price-to-sales ratio compared to the old-school profits, income streams and low-single-digit and value-based multiples of its much larger rivals.

To be fair, Lemonade stock is a fintech growth story. Sales did increase nearly 140% this past quarter compared to the year-ago period. And puny revenues of just $82.5 million optimistically mean there’s huge upside potential to continue growing and turn today’s hefty-looking $3.5 billion valuation into something much bigger. But should investors show that leap of faith today and in front of earnings out on Wednesday?  This strategist doesn’t see it that way.

Lemonade Stock Daily Price Chart

Lemonade (LMND) bearish downtrend in motion
Source: Charts by TradingView

An uncommon “sell” recommendation and below-the-market price target of $44 from Lemonade’s lead underwriter Goldman Sachs in late July sent shares tumbling out of a symmetrical triangle pattern. And the implications have continued to prove bearish. Since the analyst cut, bullish investors have never challenged the pattern breakdown. Moreover, LMND has formed a lower-low and more recently confirmed a lower-high pattern indicative of a downtrend.

With stochastics now warning of additional weakness following a bearish crossover signal, there appears to be plenty of room to move shares away from their current price tag near $64.75 to challenge Lemonade’s recent low of $56.70. And down the road, in a risk-off market environment, Goldman’s forecast of a new all-time-low could prove truly prescient.

For the time being, anyone who is long Lemonade stock or thinking about a position should consider a different kind of insurance. Namely, I’d strongly advise a protective put to hedge your long stock exposure.

Bottom line, buying a put will cost investors up front. But in our estimation, and with earnings on tap tomorrow, the premium paid looks good for more than just peace of mind and should help mitigate much larger damages while building a stronger position for the long haul.

Chris Tyler is a former floor-based, derivatives market maker on the American and Pacific exchanges. Investment accounts under management do not own any securities mentioned in this article. The information offered is based on his professional experience but strictly intended for educational purposes only. Any use of this information is 100%  the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.


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