It’s time to mark your calendars, especially if you’re invested in insure-tech start-up Lemonade (NYSE:LMND). A couple of important dates are coming up very soon, and you have a brief opportunity to reassess your position in Lemonade stock.
Just to provide a quick rundown, Lemonade stock debuted on the New York Stock Exchange on July 2 amid great buzz and fanfare. Evidently, some folks believed that this company was poised to utterly disrupt and transform the insurance market.
The company specializes in renters, homeowners and pet-health insurance, and hopes to “replace brokers and bureaucracy with bots and machine learning, aiming for zero paperwork and instant everything.”
I advised caution with Lemonade stock on Sept. 1 as the hype surrounding the initial public offering (IPO) was starting to fade. Now, we can reassess the company and the stock while also alerting traders to some near-term issues.
A Closer Look at Lemonade Stock
If you’ve been monitoring IPOs for as long as I have, you’ll probably recognize what I call the “IPO pop-and-drop pattern.”
Typically, there’s excitement surrounding a red-hot IPO and that causes a spike in the share price. Thus, in its first day of trading on July 2, Lemonade stock jumped 132% after debuting at $50.06.
On July 6, just four days later, the stock touched its all-time high price of $96.51. I hate to use the word “bubble,” but I feel it’s appropriate to describe this price action as an IPO bubble that was waiting to pop.
And indeed, by Oct. 29, the Lemonade stock price had fallen to the $47 level. Granted, the share price is now back to $65.
Still, there’s no denying that Lemonade stock is volatile and could continue to wobble for a while longer. And in fact, two pivotal events are approaching that could send the stock price lower.
Earnings in View
One of the two dates to keep in mind is Nov. 11. That’s when Lemonade will release its fiscal data for the third quarter, which ended on Sept. 30.
No one knows for sure whether Lemonade will post an earnings beat or a miss. I tend to believe that because of the IPO buzz and excitement, the earnings event could be a setup for disappointment.
After all, this company has had issues with profitability in the past. As InvestorPlace contributor Thomas Yeung points out, Lemonade lost $108.5 million in 2019 on $63.8 million of net earned premium. That means it lost $2 for every dollar it generates, Yeung writes.
He further observes that Lemonade spent $89.1 million in marketing last year. And yet, the company only generated $42.6 million incremental premium.
Reinforcing my bearish outlook are Credit Suisse analyst Michael Zaremski and Goldman Sachs analyst Heath Terry, both of whom recently assigned a sell rating to Lemonade stock. Zaremski specifically expressed concerns about Lemonade’s customer retention rates, especially among young people.
The Day After
Even if you’re supremely confident that Lemonade will post an earnings-day beat, there’s still another sizable speed bump in the road.
The very next day, on Nov. 12, the lock-up period for Lemonade stock will expire. Here’s what the press release says:
“… in accordance with the lock-up agreements, the lock-up period with respect to 33% of the securities subject to each lock-up agreement will end one business day following the release of earnings for the third quarter…”
Don’t be surprised, then, if insiders who bought shares (probably at a cheaper price) at or before the IPO decide to dump some or all of their Lemonade stock.
As a cautious and informed trader, you always need to consider the worst-case scenario. In this instance, it could be a one-two punch in the form of a possible earnings miss followed by a massive insider share dump.
The Bottom Line
The purpose of this article isn’t to scare you away from Lemonade stock. If you believe in the company, then by all means, feel free to hold your shares.
However, it’s essential that investors should know all of the relevant facts. In this case, there are two pivotal events that are coming up soon. Probably, not every Lemonade shareholder is aware of these events.
So now you know, and you can make a more informed decision. If you decide to sell your Lemonade shares, I won’t blame you. It makes sense to sidestep the potential issues and come back at a later date.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.