Back in September, I discussed the big potential with recent IPO Lemonade (NYSE:LMND) stock. But, while this big data insurance play appeared to be an intriguing opportunity, I had one concern: valuation. Selling for many times its IPO price, even after a healthy pullback, LMND stock looked richly priced at around $50 per share.
Flash forward two months, and shares are slightly higher, opening at $58.97 today. Has the story changed? Not one bit. With its focus on millennials, this company’s technological edge could give it a leg up against “old school” insurers over the long term.
That being said, it’s still a situation of “paying for potential.” That is to say, the growth premium right now remains too high — even for me, someone who doesn’t balk at paying up for quality growth.
Still, this opportunity remains on my radar, and it should be on yours as well. So, when’s the time to enter a position? When, not if, there’s another pullback. Shares remain risky in the near term, but any additional sell-off will mean it’s prime time to pounce.
Long-Term Opportunity With LMND Stock
Why do I consider Lemonade shares an intriguing opportunity? In the past few years, we’ve seen tech-savvy startups rattle cages in what are still deemed “old school” industries. As millennials enter middle age and Generation Z comes of age, we are going to see a big shift in how everyday transactions are accomplished.
One of those big shifts is coming to the insurance business. The days of going through the long, tedious process of purchasing homeowner’s, renter’s or other types of property and casualty (P&C) insurance from an in-person agent are ending.
And it’s platforms like Lemonade’s that are going to profit. Replacing agents and actuarial tables with chatboxes and algorithms, this “insuretech” leader is moving the sleepy insurance business into the 21st century. And with just 0.1% of the P&C market, saying there’s massive runway here is an understatement.
Sure, this is a long-term play. It’s going to take a few years for trends to play out and pay off for LMND stock. But even with the novel coronavirus pandemic creating a challenging environment, this company’s growth train has stayed on the tracks.
Granted, I wouldn’t go as far as saying this insurer is “crushing it” thanks to pandemic tailwinds. That is to say, the stock isn’t experiencing the growth acceleration seen with the stay-at-home economy stocks.
But with its solid quarterly results, it’s clear Lemonade remains well on its way to scaling into a massive enterprise by the end of the decade. Yet, while the long-term bull case remains intact, I admit the near term remains uncertain.
Short-Term Issues Mean It’s Wise to Take Your Time
As mentioned above, I remain cautious about diving into LMND stock. While the long-term story is compelling, shares remain where they were back in early September (around $55 per share). And while that’s a sharp decline from its post-IPO highs, it’s still a rich price to pay for a company that went public at $29 per share.
Yes, with its strong growth prospects, this stock deserves some sort of premium. But keep in mind that while the opportunity is massive, it’s far from guaranteed. To justify its current valuation, the company needs to keep on “crushing it” in the top-line growth department.
With competition from both “old school” insurers and rival “insuretech” names, this could be a challenge. If the company has even a minor revenue-growth hiccup, expect shares to make a further move lower.
However, another pullback is a good thing, not a bad thing, for those looking to enter a long-term position. Further declines will bring shares down to a more optimal entry point.
An Intriguing Opportunity—At the Right Price
There’s no denying Lemonade has a shot of beating the legacy insurance companies at their own game. By offering convenience (no-hassle online quotes), and a value proposition (premiums priced by algorithms), this company could become a major player in the P&C insurance space.
But, even after its big sell-off a few months back and factoring in its growth potential, shares remain overvalued. Despite this caveat, Lemonade remains an opportunity to keep on your watch list.
So, what’s the call? In the vein of that old expression, “when life gives you lemons, make lemonade,” here’s my take: “when markets give you another pullback, go out and buy LMND stock.”
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now.