At the beginning of this year, Lemonade (NYSE:LMND) was running awfully hot. LMND stock generally traded around $150 and as high as $188. Those prices followed a 50% spike in the first six trading sessions of 2021. Even in retrospect, it’s difficult to tell exactly what drove that big early-year move.
Now in March, however, the story is quite different. LMND stock is below $100. In fact, it’s down by over half from that January peak.
That pullback looks like an opportunity. This is one of the best growth stories out there. Lemonade has tech that can disrupt the massive insurance market. Plus, there’s really not much reason for the pullback to begin with, one which has left Lemonade stock down 27% year-to-date (YTD).
This is a classic case — one where short-term volatility has opened the door for long-term investors.
LMND Stock and the Equity Offering
In early January, LMND stock touched an all-time high of a little over $188. It’s since pulled back more than 52% from that peak. The question is: why?
Truthfully, it’s hard to tell. Yes, LMND had run hot. But even if you discount the big January spike, shares still are down some 20% in less than three months.
That move seems odd in the context of the news from Lemonade. For instance, the company had an equity offering in early January. That offering appears to have interrupted the big bull run in the stock.
In theory, that makes sense. Equity offerings dilute shareholders and add shares to the market that could create selling pressure down the line. But in practice, the selling after the offering didn’t add up.
Why? Well, first off, any investor doing their due diligence should have known an offering was coming at some point. Lemonade is still losing money as it funds growth and expands into new markets. Simply put, the company needed cash.
More importantly, though, Lemonade (and a few insiders) were able to get $165 per share from institutional buyers. Yes, that’s a discount to the highs. But it’s not a huge discount for a growth company.
And at the very least, with LMND stock back below $100, that offering price seems like an awfully positive data point. Institutional investors certainly aren’t flawless. But individual investors now can own LMND at a significant discount to what those institutions were willing to pay just ten weeks ago.
The Earnings Beat
Meanwhile, Lemonade’s fourth-quarter earnings released on the first of this month look bullish across the board. For example, LMND’s revenue outlook for 2021 was nicely above analyst expectations. So were the numbers for Q4.
Yet again, though, traders seem to have mistaken good news for bad. LMND stock dropped 17% after the report. It’s fallen another 19% since. And there’s little reason why.
Looking at Q4 results and 2021 guidance, the business is working. For Q4, what the company calls In Force Premium (basically, the quarter-end base annualized) was up 87% year-over-year (YOY). The number of customers also rose 56% while premium per customer increased 20%. That’s an excellent combination.
Lemonade is guiding significant growth in IFP for 2021. And while the company isn’t profitable, or close, positive earnings will arrive in time as long as premiums and revenue grow at an impressive clip. After all, it takes time for an insurance business to reach its needed scale.
All in all, there’s a lot to like here. There’s a reason that investors bid up the stock immediately after Lemonade’s initial public offering (IPO) and again at the beginning of this year. And earnings are another reason why they should bid it up again soon.
The Case for Lemonade
Let’s take a step back, though. The volatility in the LMND stock price is worth discussing, but we need to remember that we’re buying a business here, not just a stock. And this is a good business.
The company’s tech seems to be on point. Plus, the focus on millennials provides a demographic base whose needs will grow over time, allowing Lemonade to expand from its initial base of renters and homeowners insurance.
In fact, LMND has already moved into the pet and term-life insurance markets. Plus, more new offerings are on the way. So, Lemonade will gradually reach beyond its younger, more tech-savvy base.
Yes, we’re also looking at a company that’s still relatively small, which expects just $114 million to $117 million in revenue this year. The company remains a tiny player in the broader insurance market. And, again, it’s not profitable.
But that’s not a problem. Growth investors aren’t buying companies for what they are, but for what they will be. Lemonade has a massive opportunity. Profitability will arrive as long as growth continues — and it’s likely to do exactly that.
This a great long-term story. Now short-term traders, for whatever reason, have made that story cheaper to own — and easily cheap enough.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.
After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.