In today’s market, it’s not enough just having a great concept. For a company to succeed, it must be convenient as well. In this context, then, Lemonade (NYSE:LMND) is a one-two punch.
First, cheap insurance is always a plus. However, what really sets apart Lemonade stock is its millennial-centric app, which uses artificial intelligence to provide customers with a personalized insurance profile and quote in just a minute-and-a-half, according to the company’s website.
Basically, it’s the same principle that has made the popular trading platform Robinhood a success. Prior to the pandemic, many financial analysts noted that young people are not putting their money into the stock market for various reasons. This inaction puts them further behind prior generation in terms of wealth accumulation.
But thanks to Robinhood’s easy-to-understand interface, tons of young people have now joined Wall Street. True, the pandemic and the resultant shutdowns provides the biggest reason for this shift. Nevertheless, Robinhood was able to capitalize arguably the most on the phenomenon with its familiar, “gamified” platform.
So it is with Lemonade stock and the underlying architecture. In many ways, LMND has made insurance fun again — or as much fun as this staid topic can be. Still, it’s not all roses and teddy bears. Here are some pros and cons to consider before diving in.
A Strong Business and Cynicism Make Lemonade Stock Compelling
With the chaos that is this pandemic and the resultant economic crisis, it’s hard to think about anything else. Nevertheless, because the environment is so maddening, it’s perhaps the best time to think about insurance.
Not only that, the underlying business of Lemonade stock benefits its target millennial user because it addresses their core needs. For instance, for a very reasonable monthly fee, LMND will provide coverage for renters and homeowners.
Furthermore, it addresses the convenience factor that prevents many millennials from getting insurance. Taking only 90 seconds to complete the process, there’s no reason not to get a quote at least.
Better yet, the message is catching on. In the fourth quarter of 2017, Lemonade’s loss ratio — the relationship between claims paid and premiums received — was 166%. Anything over 100% means that an insurance firm is paying more in claims than receiving in premiums.
Technically, LMND became profitable in Q4 2018 with a loss ratio of 99%. But fast forward one year later and the company delivered a loss ratio of 73%. Again, the message is fundamentally catching on, boosting the case for Lemonade stock.
Of course, we will likely see significant changes in our new normal once the pandemic fades away. Based on prior Wall Street shenanigans, that may mean more corporations buying up residential real estate. It’s very conceivable that we are now building the foundation for a country of fiefdoms, with federal bailouts supporting billion-dollar organizations.
Cynically though, this evaporation of the American Dream could actually help Lemonade stock. After all, we’ve all got to live somewhere. And with some states requiring renter’s insurance, the narrative for LMND looks bright, even if the new normal doesn’t.
New Realities Could Also Devastate LMND
At the same time, you don’t want to throw everything into Lemonade stock without considering what kind of country we could be living in. Analyzing labor trends in the novel coronavirus-impacted society, the market could get very ugly for LMND.
Looking at the national unemployment rate, you can’t help but feel some initial encouragement. In August, the metric fell to 8.4%. Though still incredibly steep, at the peak of the crisis in April, the unemployment rate was 14.7%. And we’re now below the Great Recession peak of 10%.
However, not every demographic category in America is experiencing that recovery in the same way. Glaringly, while the white unemployment rate is 7.3%, the same metric for Black, Asian and Hispanic people is 13%, 10.7%, and 10.5%, respectively. In other words, from an economic perspective, as of August there are two races in America: white and everyone else.
Based on the fractured state of our politics and ideology, such a dichotomy is unsustainable. You can easily imagine that social unrest will continue until we see some normal rebalancing of this dynamic. In such a tense ecosystem, you ought to be careful about a name like Lemonade stock.
Another stark dynamic that has sprouted up in the new normal is the destruction of the Asian-American economy. Between 2004 and 2019, there were only nine months (out of 180) when white unemployment was lower than Asian unemployment. In the year-to-date (August), whites “beat” Asians seven times.
I find that absolutely remarkable. Did this year suddenly make Asians unemployable?
Whatever the reason for this implosion, unless this circumstance rectifies quickly, the U.S. economy will lose substantial purchasing power from Asian Americans. That could easily reverberate into rental and real estate markets, putting additional pressure on Lemonade stock.
While Compelling, You Should Also Be Careful
Overall, what Lemonade brings to the table should make LMND stock a long-term buy. We’re not just talking about renters and homeowners insurance but also pet insurance. As you know, Americans love their pets and that’s especially the case for millennials.
At the same time, a measured approach isn’t a bad idea. As I mentioned, the crippling of a major demographic in the U.S. isn’t just a social concern; it poses real economic challenges to businesses of every size. So, feel free to buy Lemonade stock, but keep your eyes on the news as well.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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.