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With Secondary Planned, Lemonade Stock Investors Could Get Squeezed

Lemonade (NYSE:LMND), which is an online insurance service for renters and homeowners policies, pulled off its initial public offering back in the summer of 2020. It was certainly an ideal time for such an offering. On the first-day of trading, LMND stock 139.3%.

Lemonade logo displayed on smartphone laying on top of computer keyboard.
Source: Stephanie L Sanchez /

But this was far from the end of the big returns. LMND stock would go on to log a gain of 531%, bringing the market capitalization to $10.1 billion. Among all the IPOs in the past 12 months, this was the second-highest return.

Keep in mind that much of the gains have come since early November. Yes, if you take a look at the chart, it looks parabolic.

So what’s going on here? And will the gains continue to be strong? Well, for the most part, I think investors needed to be cautious on LMND stock.

Let’s take a look:

Background On LMND Stock

Lemonade is only about five years old or so. The founders, Daniel Schreiber and Shai Wininger, are veteran tech entrepreneurs. Consider that Wininger is the founder of Fiverr International (NYSE:FVRR), which is a fast-growing online marketplace that has a market capitalization of $8.6 billion.

As for the inspiration for Lemonade, it was really about the potential to disrupt the massive insurance industry. The strategy the founders developed involved leveraging artificial intelligence. machine learning and behavioral economics as well as providing transparency with fees and terms.

Yet it is the underlying technology that is probably the most important competitive advantage. From the start, Lemonade has created an extensive system that processes huge amounts of data to automate quotes, customer service and even claims. Note that about a third of claims are resolved completely with a bot (called AI Jim!)

According the company’s IPO prospectus: “Our digital platform is designed to delight consumers, fueling rapid growth, which spawns highly predictive data, that our machine learning crunches to make our platform even better at evaluating risk and delighting consumers, fueling further growth … and so on. This feedback loop is visible in the continuous improvement in our key performance indicators since our launch.”

No doubt, it’s a very powerful model — and Lemonade has the potential to be an industry leader. But this will still take time. The fact is that Lemonade is still a niche player.

And as for the huge run-up for LMND stock, there has actually been little news to justify this move. True, the company did launch its service in France and won a legal case to use its brand in the country (there was a trademark with Deutsche Telekom). Moreover, Lemonade did announce that its customer base exceeded one million by the end of the year, compared to 941,000 in September.

In the meantime, the company has been growing its premium base at a robust pace, at nearly 100% on a year-over-year basis. However, the revenues are still quite small, at $17.8 million. They were actually down in the latest quarter. The company blamed this on an accounting change and the Covid-19 pandemic.

Bottom Line On LMND Stock

Again, Lemonade has an impressive platform and will definitely shake-up the industry. But the company’s rivals are massive too. Allstate (NYSE:ALL), Farmers, Liberty Mutual, State Farm and Travelers (NYSE:TRV) will definitely fight back. They have the advantages of huge marketing budgets and substantial resources to ramp investments in the digital technologies.

Yet I think the biggest risk for LMND stock is that it has gotten overheated. For example, this week the company filed for a secondary offering of 3 million shares. The sellers include insiders and venture investors. In other words, this will likely put some pressure on the shares.

Besides, in the new year, it will be extremely tough to keep up with the escalating expectations for growth. Thus, it is best to wait for a better price on this one.

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

Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence BasicsHigh-Profit IPO Strategies and All About Short Selling. He is also the author of courses on topics like the Python language and COBOL

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