Lemonade Insurance Stock: Buy or Sell

Traditional insurance is widely considered a necessary evil. Companies like State Farm, Allstate, and Liberty Mutual amass large profits through collecting premiums, paying out claims, and keeping the difference.

They also invest the money that comes in from premiums before it is paid out for claims, generating substantial returns.

It’s a lucrative system. The three homeowner’s insurance companies mentioned generated the following net income in 2019:

• State Farm – $5.6 billion
• Allstate – $3.5 billion
• Liberty Mutual – $1.045 billion

However, this business model isn’t designed to benefit consumers. The companies only make money when they charge high premiums and keep claim payouts low – or, at the very least, delay payouts as long as possible.

As a result, insurance clients often complain that their premiums are excessive, or that the companies are slow to pay out claims – assuming they don’t deny the claims altogether.

Though many consumers are frustrated with the current system of homeowner’s and renter’s insurance, there simply haven’t been any alternatives. Until now.

Lemonade has developed a new model for homeowner’s and renter’s insurance, and it threatens to turn the entire industry upside-down. The company is disrupting the insurance market, and investors have been quick to buy in since its July 2020 initial public offering (IPO).

Of course, not everyone is willing to take on the risk of a new tech company. Some investors are hanging back to watch before purchasing shares. Is Lemonade stock worth buying now, or are the more cautious investors right to wait and see?

What is Lemonade Insurance?

Lemonade is a recent addition to the blossoming insurtech industry – a group of companies disrupting business as usual in the insurance world through advanced technology. The Lemonade platform relies heavily on artificial intelligence, which means it can sell policies and process claims in minutes.

For now, Lemonade is selling renter’s insurance and homeowner’s insurance, as well as the recently-added pet insurance. The company has driven down premium prices and uses a subscription-style model for payments, resulting in significant savings for customers.

Traditional renter’s insurance premiums can be $150 or more per year, and homeowner’s policies from those same companies are typically over $900 per year.

Lemonade’s renter’s insurance policies start at $5 per month, totalling $60 per year, and homeowner’s policies start at $25 per month, totalling $300 per year. 

Lemonade has made its biggest inroads with Millennials, who are already comfortable with managing their finances online. These are the digital natives who don’t remember a time before computers were integrated into school and work, and they were the first to fully embrace the digital lifestyle that is so deeply ingrained today.

Millennials are the consumers who made online banking and self-directed online brokerage accounts popular, and they are driving the many app-based services that have cropped up in recent years – ridesharing, grocery delivery, and smart home management, to name a few.

In some ways, it’s surprising that a service like Lemonade didn’t launch sooner, as it shares the features and benefits that Millennials have leaned into again and again.

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Why Is Lemonade Insurance So Popular?

In addition to the low price and the ease of purchasing policies and submitting claims, Lemonade is popular for its philanthropic principles. The company was set up as a public benefit corporation, which changes the perspective of business leaders as they make decisions about operations, distribution of profits, and similar.

Instead of the standard corporate focus of delivering value to shareholders, Lemonade has a legal obligation to consider social implications in decision-making.

One of the most compelling illustrations of Lemonade’s public benefit perspective is the contributions it makes to nonprofit organizations.

While traditional insurance companies generate profit through the difference between premiums collected and claims paid, Lemonade relies on other methods of creating value for shareholders. The spread between premiums and claims is donated to charities selected by its clients.

As the founders developed Lemonade’s business model, they considered how this move might change customer behavior. The company believes that clients are less likely to submit unnecessary or exaggerated claims when they know that they aren’t hurting a faceless corporation – they are hurting the nonprofits that would otherwise benefit from the funds.

The altruistic component of Lemonade’s model plays well among Millennial consumers, and it is likely to attract the generation that follows.

As a group, this demographic has demonstrated the priority they place on upholding values and focusing on social causes in every aspect of their lives, from where they work to which organizations they patronize.

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Lemonade IPO Was A Hit

Lemonade was founded in 2016 and raised new capital several times in the three years that followed. Its earliest backers included investors like Aleph, Sequoia Capital, Google Ventures (GV), Thrive Capital, and Sound Ventures. The company held its IPO on July 2, 2020, pricing shares at $29.

The IPO was a resounding success, with shares trading at $50.06 by the end of the day. Investors immediately saw the potential in a company that simplifies a product nearly everyone needs, then sells it at a rate far lower than its competitors.

It helped that Lemonade has received a lot of positive press from business experts and analysts before shares were available to the public.

For example, Lemonade was ranked number 17 on CNBC’s 2020 list of Disruptor 50 Companies, which put it directly in the spotlight as far as companies to watch.

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Is Lemonade Stock Going to Fall?

In just a few weeks, Lemonade stock has already put early investors through a roller coaster of ups and downs. After a day of trading, share prices were up by 138 percent, then a week later, they dropped 13 percent. Another two days and shareholders saw a 7 percent increase.

Perhaps the most unnerving part for investors without a lot of IPO experience is the fact that these ups and downs aren’t linked to any news from the company.

When companies go through the IPO process, they observe a quiet period for 40 days after the stock begins trading, and no new information is released. That means the share price volatility is essentially based on investor sentiment, which tends to be fluid for the first few months of trading.

In other words, Lemonade stock is likely to fall again, and it may be impossible to predict when and how much.

More than that, even the most experienced analysts can only theorize why the price drops occurred after the fact.

This is all part of the IPO experience, and it is generally nothing to worry about. As the company begins to build a history, stock prices will settle down a bit.

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Is Lemonade Stock a Good Buy?

Any investment carries risks, and insurtech certainly has its share. Given the volatility inherent in the early days of trading a new stock, Lemonade isn’t right for everyone at the moment.

With that said, those who are comfortable with uncertainty and can manage the highs and lows that come with the first few months of any IPO, Lemonade stock is a good buy.

In fact, if all goes according to the company’s plan, it may never be a better buy than it is right now.

Consider the advantages Lemonade has over its peers:

• An astonishing 94 percent of workers surveyed by Glassdoor said they would recommend working at Lemonade to a friend.
• A full 97 percent of respondents approve of Lemonade’s CEO.

These two elements are critical indicators of a strong company culture, which bodes well for the company’s success.

From a financial perspective:

• In 2019, year-over-year revenue growth topped 201 percent, totalling $63.8 million.
• Through its use of artificial intelligence, chatbots, and other advanced technology, Lemonade expects to serve 2,000 customers per employee. Compare that to the 150 to 450 customers per employee of Lemonade’s biggest competitors. Greater efficiency tends to generate bigger profits over time.

Granted, Lemonade isn’t showing a profit yet. In fact, 2019 generated a massive loss of $109 million.

However, when you consider the sales, marketing, and technology expenses involved in establishing any new company, much less a disruptive financial services company, there is every reason to believe that profitability will come as the company gains momentum with consumers.

In short, those that can handle some early uncertainty may want to add Lemonade to their portfolios now. Some industry experts believe share prices have nowhere to go but up.

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Alternatives to Buying Lemonade Stock

For those who aren’t quite ready to trust their hard-earned cash to an untested startup, there are alternatives.

First, you may wish to consider traditional insurance companies, which are still doing quite well.

If Lemonade succeeds in dramatically transforming the industry, it will happen over time, giving those who hold shares of traditional insurers enough notice to reconsider their choices.

These are three of the top-performing insurance stocks:

• MetLife – Simple business model, reliable history of solid returns, and impressive dividends
• UnitedHealth – Market leadership, shareholder-friendly management, and dividends that increase regularly
• Markel – Handles niche clients, generates solid underwriting profits, and gets creative with investments

If investing in an insurance company isn’t quite what you had in mind, you may wish to examine opportunities available from other, more established tech disruptors.

• Dropbox – Increasing revenues and an expanding customer base are projected to generate approximately 23 percent growth in profits for 2020
• PayPal – A widening international presence promises impressive results for 2020 and 2021 – revenue growth predictions estimate 15 percent per year
• Amazon – Rising interest in e-commerce and delivery-based services has analysts projecting 18.5 percent revenue growth and 30.7 percent earnings growth this year

These companies may lack some of the excitement of a start-up’s early days, but they are still a long way from settling into a rut. Investors who choose one or more of these alternatives have a lot to look forward to.

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The Bottom Line: Is Lemonade Stock Worth Buying?

Lemonade has generated significant interest in a fascinating model that will upend the insurance industry – assuming it catches on. At the moment, there is every reason to believe it will.

However, as with any tech startup – and really any stock purchase at all – there are no guarantees. Any one of a hundred things could go wrong, leaving shareholders with substantial losses.

The question of whether to buy boils down to your financial goals and your tolerance for risk.

If you can afford to take a chance on a promising tech startup, this one is a good bet. If you have minimal room for error, a more established company with a history of success and the tools and resources necessary to ensure a strong future might be a better option.

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