One of the hardest things for individuals to do is balance the truth between two conflicting statements. That’s the problem I see for Lemonade (NYSE:LMND). The company may in fact be the greatest thing since sliced bread. But LMND stock also looks overvalued at the moment, at least if you believe the analysts.
Of eight analysts that are weighing in on the company, only one appears to give the company a price target ($163) above its current price. As of this writing, that is $151.24 per share. The consensus forecast has shares below $100 which is where Citron Research claims the company’s shares will drop to.
Of course, Citron made many other bearish statements about Lemonade. And the firm’s comments seem to be having some effect on LMND stock, which has dropped 15% in the last month before rebounding over the last two days.
However, as I said at the beginning, this could be a case of two things being true. That will be for you to decide.
Lemonade: Insurance For a New Generation
Lemonade does not hide the fact that it’s not like other insurance companies. It’s not just about having an app. It’s not just about lower costs. The company is making inroads with millennials and Gen-Z consumers, and their commitments to social causes.
“…the company has a unique charitable component that is very appealing to the young demographic that, for now, makes up its customer base. Whatever is left over in the pool does not go to the company by way of profit but gets paid out to charities of the customer’s choosing.
“The thinking is that the customers have an incentive to not file frivolous claims because it would take away from their charities.”
Time will tell if that will play out the way Lemonade believes. But one thing is sure; an automated process for claims and approvals without having to go through an agent is a win for this generation. Then you add in the fact that the company is now providing insurance for pet health (another win) AND that the company is leaning into a generation that is more likely to reward social issues (another win).
Perception is reality. Lemonade may not have a moat. But right now they’re the cool kid on the block and that kind of street cred is much more likely to stick than “Jake” from State Farm.
Will the Third Time Be a Tiebreaker for LMND Stock Earnings?
One positive for Lemonade investors is the company has two earnings reports in the book. When the company reported in August 2020, it scored a narrow beat on the top line, but missed on the bottom line. That’s a loss in most analysts’ books. However, in November, LMND stock beat analysts’ estimates on both the top and bottom lines.
The company is not yet profitable, so investors are looking for forward progress, particularly on the bottom line. Lemonade lurched towards profitability in its most recent quarter. That may have to do with the fact that it was able to reduce its gross loss ratio by six percentage points (from 78% to 72%) from the prior year.
The gross loss ratio is a key metric for any insurance company, but it’s especially important to Lemonade because its business model relies heavily on reinsurance. Reinsurers take on 75% of potential losses and pay Lemonade a 25% commission.
This simply means that for every $100 in premium payments that Lemonade receives, it keeps 25% which represents the customer’s “fixed fee” and passes the remaining 75% to reinsurance partners.
This model works well if Lemonade’s gross loss ratio is below 75%. Anything higher than that and the reinsurers will lose money. And that would make the reinsurers likely to impose less favorable terms on Lemonade in future contract renewals.
At This Price, You Can Wait On Buying
Lemonade stock appears to be more overvalued than overbought. However, bears seem to have control of the narrative right now and that may not be a bad thing. Even if Citron is right, if you were an early adopter of LMND stock you’d still be sitting on a nice gain if the stock drops to $100.
Right now, the smart play may be to sit on the sidelines until the company’s earnings report in early March. If it looks like the report will be a good one, the price should be at a better value than it is today.
On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Markoch is a freelance financial copywriter who has been covering the market for seven years. He has been writing for Investor Place since 2019.