My default position on Lemonade (NYSE:LMND) stock has been that investors should wait for a pullback. Those who followed that advice have done quite well.
Of course, those that didn’t have done pretty well, too. Lemonade went public in early July at $29 per share. LMND stock more than doubled on its first day, closing above $69.
From that point, better prices were on offer: Lemonade dipped as low as $44 in early September and threatened those levels again the following month. In December, however, Lemonade stock has taken off.
Shares have rallied 49% in one month. LMND stock touched an all-time high on Tuesday; it ha s now risen almost 75% on top of that massive first-day pop.
After that rally, my original advice holds. This is a wonderful business, but at a currently questionable price.
An Attractive Business
Broadly speaking, the optimism toward LMND makes some sense. This is an intriguing business.
Simply put, Lemonade is looking to disrupt the insurance business. It’s using digital strategies to better market to customers, better analyze its risk, and better price its products.
It’s easy to argue that the legacy insurance giants can do the same thing. But the history of technology shows it’s usually not as simple as all that. Incumbent giants are slow to make moves. They often take a “if it ain’t broke, don’t fix it” approach.
The problem is that sometimes it is broke. Even if it’s not, a nimble rival like Lemonade can improve on existing strategies, thanks to fresh eyes and a different approach.
To begin with, Lemonade is targeting millennials, an obvious demographic choice for the current business model. But, over time, its customer base should expand into older, wealthier, and more profitable age groups.
The novel coronavirus pandemic should only accelerate that shift. Growth in basically everything digital has been accelerated and pulled forward by the pandemic. That’s why e-commerce companies, payment processors and many software companies have seen their shares rally, even with negative short-term effects. I don’t believe insurance will be any different.
The LMND Stock Price
So the rally since the IPO has some logic behind it. It’s the size of the rally, however, that looks worrisome.
At this point, Lemonade stock has quadrupled from its IPO price. That $29 price was actually above a range that was raised before the offering.
Obviously, we’re used to the so-called IPO ‘pop’ and we’ve seen some massive first-day gains this year. Even by those standards, however, the 300% rally in LMND in less than six months seems a bit questionable.
Bear in mind that in June, Wall Street bankers were looking to price the stock at $25 at most. Lemonade was happy to sell that stock — 12.65 million shares worth — at $29.
Those two facts don’t mean the stock is only worth $29 (or less). But they do raise concerns about the current price of $116.
So does analyst opinion. Obviously, Wall Street gets it wrong sometimes. That’s been particularly true in some of the faster-growing areas of the market, where it seems like analysts are following the pack rather than leading it.
But I’d go back to a pair of analyst notes from October. One valued LMND at $56; the other at $44. Both targets obviously are significantly lower than the current price.
And each analyst made some interesting points. One noted lower customer satisfaction, an obviously important potential issue. Another pointed to five years of operating losses and the need for more capital.
Whether those analysts are specifically correct is not the point. Rather, the point is that there are risks here. They don’t necessarily seem priced in.
What’s Changed?
Since early November, we’ve seen huge rallies in a number of ‘hot’ sectors and with a number of ‘hot’ stocks. LMND was a bit late to the proverbial party, but in December it caught up in a hurry.
In some cases, those rallies make sense. For LMND, however, the case is a bit more difficult to make. It’s fair to ask after the past three weeks: what’s really changed?
The answer seems to be: not much. The long-term drivers for Lemonade are the same in late December as they were in late November. The potentially beneficial aspects of the pandemic were known when Lemonade was pricing its stock at $29 toward the end of June.
There really hasn’t been a notable piece of good news during this rally — yet Lemonade’s market capitalization is now about $2.5 billion higher. Perhaps that holds, but as attractive as the Lemonade story is, I’d still like to see a lower price on Lemonade stock.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
