Why Lemonade Stock Looks Like a Buy Here

As you’ve probably noticed, rapidly growing, unprofitable, tech-oriented stocks have done terribly since March 2021, and the trend has intensified since December. Largely as a result of the Street’s tremendous aversion to unprofitable growth stocks, Lemonade (NYSE:LMND) stock has plunged, tumbling over 70% in the last year.

It’s true that I was bullish on the shares back when they were trading around $100 in late January 2021. Today they’re changing hands for under $24.

But despite this horrible performance, the company is still rapidly growing, its losses are expected to peak this year and the macro outlook is poised to become more favorable for Lemonade. Thus, I can’t help but remain upbeat on the long-term outlook for LMND stock. Therefore, I recommend that growth investors buy a small number of its shares.

Rapid Growth and Peak Losses for LMND Stock

The value of Lemonade’s in-force premiums soared 78% year-over-year in the fourth quarter of 2021, versus the same period a year earlier. Moreover, its revenue jumped 100% YOY in Q4. Additionally, the insurer’s “Premium per customer” climbed 25% YOY.

According to Lemonade CFO Timothy Bixby, the latter increase was caused partly by its customers  buying more policies and purchasing more expensive insurance from the company. It appears that, in line with my longtime thesis on LMND stock, the company is benefiting from the increased purchasing power of its young customers as they age.

Indeed, on Lemonade’s Q4 earning conference call, co-CEO Daniel Schreiber “called out” this phenomenon, saying the company’s strategy is to “grow with [its customers] by offering them all the upgrades and coverages that they will naturally grow into as they go through predictable life cycle events.”

And importantly, Lemonade expects its EBITDA losses to peak this year and rebound “in each subsequent year.”  As a result, I believe that investors will soon start pricing significant profitability improvements into LMND stock.

An Improved Macro Outlook

It seems that more of the Street is starting to think that the Federal Reserve will raise interest rates more slowly than expected, a view I’ve held for some time. For example, a BlackRock (NYSE:BLK)executive recently said that the Fed would hike more slowly than many anticipate  and would be likely to embrace more gradual rate increases later in the year as inflation cools.

Also helping the macro outlook is the fact that Russia is now focusing on attacking southern and eastern Ukraine, instead of most of the country, while Russia’s foreign minister said that his nation would refrain from using nuclear weapons in the conflict. As a result of these developments, the chances of the war spreading have dropped dramatically.

In both company-specific and macro areas, the outlook of LMND stock appears to be meaningfully rebounding.

On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Larry Ramer has conducted research and written articles on U.S. stocks for 15 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 GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.


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