I can’t remember the last time I wrote about an insurance company. So, the fact that Lemonade (NYSE:LMND) is the subject matter of today’s article has me very excited about discussing the recent dip in Lemonade stock.
Flying high, up 169% through July 24, from its July 1 initial public offering price of $29, Goldman Sachs analyst Heath Terry dealt a big blow to the stock’s momentum July 27, when he cut the fintech’s target price by nearly 50% to $44. Not only did the analyst reduce the target price, but he also initiated coverage of the stock with a sell rating.
That’s not exactly a ringing endorsement.
Now, to be precise, were LMND to be trading at $44 in 12 months, IPO investors would still be sitting on a 52% return over 13 months. That’s not exactly chopped liver.
However, when an IPO’s lead underwriter stabs it in the back, investors ought to seriously consider the reasons why before buying on the dip.
A Lack of Profits
The job of an underwriter, whether the lead or not, is to elicit interest in an IPO’s shares. Goldman Sachs did that as Lemonade was able to sell 11 million shares, raising gross proceeds of $319 million. That doesn’t include a possible over-allotment of 1.65 million shares. It plans to use the net proceeds for general corporate purposes.
Anyone who looked at Lemonade’s prospectus would have been able to see that the company lost $161 million in the past two fiscal years on less than $90 million in premiums, net investment income, and commission income. This means for every dollar of revenue, Lemonade lost $1.79.
In the risks section of its prospectus, it states:
“We have not been profitable since our inception in 2015 and had an accumulated deficit of $198.3 million and $234.8 million as of December 31, 2019 and March 31, 2020, respectively.”
“…[W]e may not achieve or maintain profitability and we may continue to incur significant losses in the future.”
So, the fact that Terry, the Goldman analyst charged with covering Lemonade, would tell his clients that the fintech has some serious financial issues is rather jarring.
“Goldman Sachs’ analysts, led by Heath Terry, wrote in a note to investors that Lemonade, founded in 2015 by Israeli entrepreneurs Daniel Schreiber and Shai Wininger, is facing five more years of operational losses before it will see any profits,” CTech contributor Sophie Shulman reported.
“‘Lemonade is essentially venture investing in the public markets,’ the note read. The analysts further stated they believe the company presents a higher risk profile than is represented by its current price.”
The analyst is correct to point out that anyone who buys Lemonade stock is doing so not as a retail investor, but rather as a venture capitalist.
Given IPO stocks can often be bought for less than their IPO price within 12 to 24 months of their initial offering, investors ought to carefully consider whether the dip over the past few days is a buying opportunity or a warning that when you play with fire, sometimes you get burnt.
InvestorPlace Contributors High on Lemonade Stock
Despite the lack of profits, several InvestorPlace contributors are confident that Lemonade is the real deal.
Matt McCall believes that the insurance startup’s disruptive ways make the company a long-term winner.
“How so? Via AI (artificial intelligence) and machine learning. With this technological edge, they can compete with larger, more established names while also carving a viable path to profitability.”
The analyst doesn’t believe Lemonade’s pathway to profitability is paved with gold.
On July 23, InvestorPlace’s Larry Ramer suggested that investors should buy Lemonade on a pullback to $70. Well, it’s currently trading at $64.48 as I write this, so I’m going to assume my colleague is even more stoked about buying Lemonade now that it’s more than $5 lower.
He argues that the company has barely scratched the surface of the insurance industry, offering only homeowners’ and renters’ insurance at the moment. Next on the list is pet insurance (something I’ve never bought despite owning between three to six animals at any given time), so the sky’s the limit in an industry that’s woefully slow to react to consumer needs.
While I get the argument, it’s impossible to know if the company’s moves into different insurance categories will be slam dunks like its current offerings have been.
At $60, despite the fact I like disruptor companies, I would be hard-pressed to want to buy Lemonade stock. However, were it to drop into the high $40s or low $50s, I might be willing to reconsider my stance.
As Shark Tank panelist Mark Cuban would say, “I’m out.”
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.