Why Long-Term Investors Should Buy Lemonade Stock on Weakness

The weakness of Lemonade (NYSE:LMND) stock in recent weeks, along with the company’s strong growth and promising outlook, make the shares worth buying for long-term investors.

In the month  that ended on Sept. 5, LMND stock sank 30%.  The shares, which went public in July, were about 50% below their all-time high on Sept. 8.

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

Lemonade Is Growing Rapidly and Profits Are on the Horizon

In the second quarter, the company’s revenue soared 117% year-over-year, and its in-force premiums, also more than doubled YOY. It jumped 115%.

Indicating that Lemonade will likely become profitable as it continues to expand,  the insurer’s gross profit climbed 218% to $3.7 million.

Despite the company’s rapid growth, its operating expenses rose just 12% YOY, also boding well for Lemonade’s future profitability.

Poised to Benefit From the Urban Exodus

Lemonade will likely continue to grow rapidly, driven by the appeal of its business model to millenials and important macro trends.

Lemonade is well-positioned to get a boost from the exodus to the suburbs and increased pet ownership.

Many Americans are moving from cities to the suburbs. By relocating to the suburbs, consumers can escape cramped apartments and mass transit where social distancing is difficult. Those who wish to eat in restaurants are more likely to be able to do so in cities. Suburbs tend to have less crime and violence.

Home ownership is much more prevalent in the suburbs than in cities. Further, although Lemonade sells both rental insurance and homeowners’ insurance, the latter coverage is much more expensive and thus much more lucrative for Lemonade. Consequently, the exodus to the suburbs should prove to be positive catalysts for LMND stock.

The exodus should also accelerate the trend of increased home ownership among millennials as they age and their income rises, causing the insurer’s growth to accelerate.

In recent months, extremely strong sales of new and existing homes  homes is indicative of the strength of the movement out of cities and the resulting surge in home ownership.

Pet Insurance Should Help Lemonade

Moreover, after Lemonade wisely decided to launch pet insurance in July, the company is very well-positioned to benefit from increased ownership of pets in the U.S. in the wake of the coronaviurus lockdowns.

According to one study, 67% of Americans own a pet,  And during the pandemic, pet ownership has increased.  In a statement on the press release announcing the initiative, Lemonade CEO Daniel Schreiber said:

“The US pet insurance market is valued at a couple of billion dollars, and with the increasing number of pet adoptions coupled with rising veterinary costs, we believe this market can grow rapidly.”

I agree with that sentiment. Further, Lemonade can use its pet insurance to attract new customers and then subsequently sell them much more lucrative homeowners’ insurance.

Reducing Risk and Conservative Guidance

Lemonade’s decision to give a set percentage of all of its premiums to reinsurers in exchange for them paying out the same percentage of claims reduces its risk meaningfully. The change should please the Street which is, of course, always searching for good risk-reward ratios.

Finally, Lemonade provided weaker-than-expected Q3 guidance. The company indicated that it was being conservative on its Q3 outlook due to uncertainty about whether people, in the midst of the pandemic, would relocate this time of the year. I think the exceptionally strong home sales data, however, proves that Americans are moving more, not less, than usual.

The Bottom Line

Lemonade is growing rapidly and looks set to be highly profitable within the next two years. Lemonade stock should be boosted by multiple favorable macro trends. As a result, long-term investors should buy the shares.

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

Larry has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks have been solar stocks, Roku, and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.

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