After selling off following its July IPO, investors have jumped into Lemonade (NYSE:LMND) stock with a vengeance these past few weeks. In the past month alone, shares in this “insurtech” play have soared nearly 54%. But, as shares hold steady around $93 per share, is now the time to dive into this “hot stock?”
Yes and no. On one hand, despite its current rich valuation, its potential runway is massive. Via its use of artificial intelligence (AI) to price policies, Lemonade has the opportunity to outfox the legacy “analog” insurers at their own game. Add in its fully online process (a favorite with millennials), and it’s easy to see this company do to “old school” insurers what Carvana (NYSE:CVNA) has done to the “old school” auto dealer business model.
On the other hand, while its prospects look bright, that doesn’t mean shares are a buy at any price. A mad rush in investor interest, not a game-changing improvement in its operations, is what’s behind the recent rally. Once this cools, expect shares to fall back towards prior price levels.
So, with this in mind, what’s the call? Keep this on your watch-list, but hold off until this “hot stock” falls back to earth.
Why Investors are Excited About LMND Stock
Lemonade shares have been trending higher since early November. But, it was a recommendation from The Motley Fool that put shares into hyperdrive. As InvestorPlace’s Sarah Smith wrote Dec. 3, shares soared over 20% on that day, following a “buy” recommendation from Motley Fool CEO Tom Gardner.
But, Dec. 3’s double-digit pop was only the start for LMND stock. In the week that followed, shares continued to soar. Shares briefly topped $110 per share, before falling back on Dec. 11. What’s driven this continued interest? Chalk it up to its Dec. 9 investor presentation, along with continued increased awareness of this growth story by retail investors.
With its compelling narrative (pricing insurance using algorithms, targeting millennials who prefer the hassle-free online experience), it’s no shock investors are chomping at the bit to bid Lemonade higher.
However, while it has big potential to give property & casualty (P&C) insurers like State Farm a run for their money, that doesn’t mean it’s a screaming buy at today’s prices. With several concerns to consider, there’s no guarantee of long-term success for this leading “insuretech” name.
Lemonade’s A Disruptor, But Far from a Slam Dunk
With Wall Street and Main Street aware of its potential, LMND stock trades at a rich valuation. As it stands now, based on its market capitalization of over $5 billion, versus less than $100 million in trailing twelve month (TTM) sales, it’s clear investors aren’t buying this on current fundamentals.
But, despite its high potential, there are three key factors that could impact its future performance. With each one in mind, potential gains may not be worth the risk at today’s prices.
Firstly, the company may underwhelm when it comes to growth in the coming year. Consensus calls for 2021 sales of around $110 million, versus estimates of around $93 million for 2020. Sure, as seen from its latest earnings release, sales results could exceed expectations. Yet, investors are pricing this as if sales are set to double again. If this fails to happen, expect shares to dip from today’s prices.
Secondly, the company’s reliance on reinsurance. As this Seeking Alpha contributor recently wrote, this dependency may be a key risk with this and other “insuretech” names. While so far the reinsurance industry has been willing to accept near-term losses, don’t expect this to continue if its unprofitable for them in the long run to underwrite “insuretech” policies.
Thirdly, while the most well-known “insuretech” name out there, it’s hardly the only one. Rival Hippo is already a direct competitor when it comes to homeowner’s policies. Another potential rival, Root, has focused on auto insurance, policies Lemonade has yet to offer. Also, don’t expect incumbent insurers to rest on their laurels. Whether by pivoting to this business model, or by acquiring its rivals, I don’t see the “old school” insurers going quietly as Lemonade starts to eat their lunch.
An Interesting Opportunity, But Not at Today’s Prices
With trends on this growing industry’s side, there’s big opportunity with insuretech names like Lemonade. Yet, at today’s prices, with shares “priced for perfection,” risk/return is not in your favor here. Much of its potential growth is more than accounted for in its share price. And, if the company experiences any hiccups (and chances are, it will), don’t expect this stock to stay at current price levels for long.
Bottom line: if shares pull back from here, give it another look. But, for now, hold off on LMND stock.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.