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With Lemonade Firing on All Cylinders, the Shares Are Still Worth Buying

Lemonade (NYSE:LMND) appears to be executing its strategy very well, while more investors and pundits are becoming bullish on LMND stock. Also positive for the shares is the company’s tremendous growth potential. In light of these points, I remain upbeat on the stock’s longer-term outlook.

mobile phone screen displaying lemonade (LMND) website
Source: Piotr Swat /

In my previous column on Lemonade, I urged investors to buy the shares, partly due to  increasing home ownership among millenials, who constitute the core of the  company’s customer base. The company’s third-quarter results and its comments about its earnings indicate that my assessment was correct and suggest that Lemonade’s strategy is bearing fruit.

Lemonade’s Q3 Results and Comments Are Positive

Lemonade’s Q3 earnings per share and revenue came in meaningfully above analysts’ average estimates.  Moreover, its in-force premiums nearly doubled year-over-year, its customer base jumped 67% YOY to over 941,000, and the company’s average premium per user climbed 19% YOY. Further, despite a high number of hurricanes and wildfires in the U.S. in Q3, Lemonade’s gross loss ratio fell six percentage points YOY.

Importantly, in its Q3 letter to its shareholders, the company reported that the in-force premiums “generated  by Lemonade renters ‘graduating’ to become Lemonade homeowners, grew by over 300% in Q3 2020 as compared to Q3
2019.” The insurer added that “This trend suggests that a central plank in our strategy is playing out: acquiring renters at a time and a cost that incumbents struggle to, then delighting them so that as their insurance needs grow – they grow with us. ”

These comments show that my thesis about the company benefiting from increased home ownership among millennials is playing out.

Another element of my positive thesis on LMND stock — the ability of the company to use its new pet insurance offering to attract additional customers who will then buy other products — has also proved to be on-target.

Specifically, in Q3, “about 40%” of pet-insurance policies were sold to new customers, and “about 5%” of these new customers also bought homeowners’ or rental insurance from Lemonade. Of course, that percentage should climb dramatically as time goes on.

And I agree with the insurer’s assessment, expressed in its Q3 shareholder letter,  that the decline in its gross loss ratio, despite the high number of natural disasters in the U.S. in Q3, validates its “cautious approach to
underwriting in wildfire zones and in hurricane prone parts of the country.” Its strong performance in this area may also show the power of its AI-driven approach to assessing risk.

Optimism About LMND Stock Has Surged

On Dec. 3, Motley Fool’s founder and CEO, Tom Gardner, recommended Lemonade’s shares. On Twitter, according to InvestorPlace reporter Sarah Smith, Gardner contended that the insurer “is  an industry disruptor, largely thanks to its use of artificial intelligence.” Lemonade is now one of Motley Fool’s top ten stocks to buy.

Meanwhile, last month Softbank (OTC:SFTBY), a giant Japanese investment firm, reported that in Q3 it had slashed its total portfolio by more than $4.5 billion and liquidated its stakes in 24 companies. And here’s the kicker: it  only acquired positions in two new companies last quarter: Lemonade and Line (NYSE:LN).  Specifically, as of Sept. 29, it owned a 21% stake in Lemonade, now worth a pretty hefty $595.8 million. And the fact that the shares have jumped 84% in the last three months suggests that many other investors are getting more bullish on Lemonade.

And finally, the  majority of the InvestorPlace and Seeking Alpha writers who have posted pieces on the stock in recent weeks have been bullish on the shares.

The Bottom Line

Lemonade is growing rapidly, and its business model appears to be quite attractive to millennials. Moreover, its gross profit has also been soaring,  more than doubling YOY, excluding some  items, last quarter. That indicates that the company will become profitable sooner rater than later as it continues to expand quickly.

Further, with less than 1 million customers as of the end of Q3, the company has many ways to grow going forward. It can , of course, use sales and marketing to capture many more customers in the U.S., and it can add more types of insurance going forward.

In fact the company said in November that it plans to begin offering term life insurance “in the coming months” and indicated that it would sell more types of insurance further into the future. Finally, Lemonade, after recently entering “its third European country,” can greatly expand its overseas business.

Given the company’s tremendous growth potential and its still-small market capitalization of $4.18 billion, I recommend that investors 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 Ramer 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. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been Roku, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.

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