Is Lemonade Stock a Buy Over $50?

The last time I wrote about Lemonade (NASDAQ:LMND), the insurance fintech disruptor that went public in July at $29 a share, I argued that Lemonade stock at $60 was too expensive.

It's a Compelling Company, but Now Isn't the Time to Buy Lemonade Stock
Source: Piotr Swat / Shutterstock.com

However, were it to drop into the low $50s or even the $40s, my opinion might change. Since Aug. 6, it’s lost 13% of its value through Sep. 6. It’s getting closer to me having to put my thinking cap on.

One thing that could alter my view is Lemonade’s latest quarterly report, which dropped on Aug. 11, just days after my piece went live. The second-quarter results weren’t perfect.

On the top line, revenue was $29.9 million, $590,000 better than the analysts’ consensus estimate. On the bottom, it lost $1.77 a share, almost double the 95-cent estimated loss.

Startups aren’t expected to make money off the hop, so it’s not a dealbreaker, but I’m going to have to come up with some tangible reasons why I should still consider it.

The Latest Fiscal Year

Lemonade said in August that it expects to generate between $86 million in $88 million in revenue in fiscal 2020. That’s based on at least $147 million in gross earned premium.

Gross earned premium is defined by the company as follows:

“Gross earned premium represents the earned portion of our gross written premium. Our insurance policies have a term of one year and premium is earned pro rata over the term of the policy.”

Lemonade offers several types of insurance policies, including renters, condo, co-op, homeowners, and pet health insurance. It also provides landlord insurance for those who rent out their properties less than five times a year.

All of these policies charge an annual premium that is collected monthly through your credit card. Easy as pie.

So, based on the definition above, if your renters’ policy is $300 per year and we’re two quarters into the year, the gross earned premium is $150—enough about premiums.

What’s important here is that Lemonade is growing at a decent clip. In fiscal 2019, it had total revenue of $67.3 million. In 2020, it expects $87 million in revenue at the midpoint, a year-over-year growth rate of 29.3%.

How Good Is That Rate of Growth?

In Lemonade’s IPO prospectus, it states five competitors: Allstate (NYSE:ALL), Farmers, which is owned by Zurich Insurance (OTCMKTS:ZURVY),  Liberty Mutual (policyholders are the shareholders), State Farm (also a mutual company), and Travelers Companies (NYSE:TRV).

Of the three public companies, Allstate has a three-year growth rate of 6.1%, Zurich’s is 2.3%, and Travelers is 4.6%.

Now, while this isn’t an apples-to-apples comparison, it does indicate that the three companies from above are incredibly mature businesses. At the same time, Lemonade was only founded in 2015 by people who knew very little about insurance, except that it needed to be disrupted.

I wrote about the Canadian insurance industry for a short spell. While I’d never be confused for Warren Buffett, I do know enough to know the insurance industry is slowly dragging itself out of the stone age. Lemonade’s hopefully going to speed up the process.

All of this to say that over the past two fiscal years, should Lemonade meet its target for 2020, it will have grown its revenue by 97.8%, compounded annually.

The big question is whether its rate of growth continues to decrease over the next few years, or does it accelerate?

As it scales, it will add revenue streams (new types of insurance) while also attracting more customers for its existing types of insurance. There was a time when people thought Lululemon’s (NASDAQ:LULU) growth was going to stall; instead, it’s seen its growth rate accelerate, and that’s tough to do from a larger starting point.

I like what Lemonade’s doing in the insurance marketplace. I wonder if it’s enough to justify a valuation of 29 times sales when the average of the three above is less than one times revenue.

Is Lemonade Stock a Buy Over $50

InvestorPlace’s Brett Kenwell recently discussed this very subject.

I like the long-term potential of Lemonade. But I don’t want to buy into a non-bullish technical setup with the S&P 500 at all-time highs. Especially with a recent IPO. With that said, when could this buy a buying opportunity?” Kenwell wrote on Sep. 1.

His answer?

Well, I’m not a technical analyst, but if I read his words correctly, $44.93 appears to be a second resistance level on the downside, so while it could test this in the coming weeks, that might be as good as it gets for an entry point in the near term. It hit a low of $44.11 on September 4. And as I write this on the second day of the week (Sep. 15), it’s trading below $50.

With no negative news at the moment, something tells me it’s going to move back into the mid- or high-$50s before too long.

However, for margin of safety purposes, I would hold off buying to see if it retests $45 at some point in the future.

Long-term, if you have some fun money you can afford to lose, buying over $50 shouldn’t kill you, but you’ve got to hold for longer than a year or two to benefit from Lemonade’s growth.

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.

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.


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