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Wall Street Has Soured on Lemonade, but Its Acquisition Could Be Very Profitable

When New York-based Lemonade (NYSE:LMND) held its initial public offering (IPO), investors’ sentiment towards the stock was largely positive. Seven months later, it’s hard to find anyone who is bullish on LMND stock.

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When New York-based Lemonade (NYSE:LMND) held its initial public offering (IPO), investors’ sentiment towards the stock was largely positive. Seven months later, it’s hard to find anyone who is bullish on LMND stock.

Source: Stephanie L Sanchez / Shutterstock.com

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That is surprising, since Lemonade seems to be doing well in the digital-insurance sector. For example, during the third quarter, the company increased its customer base by 45% year-over-year.

Not only that, but Lemonade’s Q3 revenue doubled YOY. Yet LMND stock has defied the data and disappointed investors.

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On the other hand, it’s still early in the game, and the stock could become a long-term winner. With some time and a whole lot of patience, it might be possible for the investors to turn this lemon into lemonade.

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A Closer Look at LMND Stock

Going back to where it all started, Lemonade debuted at $50.06 on the New York Stock Exchange on July 2, 2020. LMND stock rallied for awhile, topping out on Feb. 7, 2021, at $168.44.

In hindsight, it’s evident that this rally ran too far, too quickly. It’s possible that Reddit users short-squeezed the stock to its peak price and then moved on to other targets soon afterward.

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For most of 2021, LMND stock had a rough ride, and early 2022 didn’t provide much relief, either. In mid-afternoon trading today,  LMND stock had tumbled below $24.

While the stock’s  highs were probably too high, the ensuing selloff of the shares may be overdone. After all, Lemonade is an ambitious, disruptive company, and eventually Wall Street might appreciate its bold vision again.

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Keeping Dogs and Cats Healthy

What is that bold vision, exactly? Lemonade evidently seeks to replace brokers and bureaucracy with bots and machine learning, in an effort to eliminate paperwork and provide “instant everything.”

As you might expect, the company offers renters’, homeowners’ and life insurance. That’s not all, though. Lemonade also offers pet insurance, including an artificial-intelligence-driven preventative-care package for puppies and kittens under two years old.

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Since the $2 billion U.S. pet-health-insurance market “tends to focus on coverage for accidents and illness, rather than preventative care for young pets,” Lemonade might be able to carve out a lucrative niche market.

Lemonade’s overall suite of pet-insurance offerings is called Lemonade Pet. Not long ago, the company reportedly started offering its pet-insurance products in Massachusetts.

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Consequently, Lemonade now offers pet insurance in 37 U.S. states. Data from the North American Pet Health Insurance Association indicates that the North American pet-insurance sector is comprised of only around 20 companies.

So there’s likely room for Lemonade to deploy its machine-learning-driven methodology and obtain a sizable percentage of  this burgeoning American industry.

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Huge Value Unlocked

Lemonade also launched an automotive-insurance product late last year, known as Lemonade Car. Like the company’s other insurance products, Lemonade Car incorporates big data and artificial intelligence.

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Interestingly, there’s another company that has a very similar product to Lemonade Car. That company is known as Metromile (NASDAQ:MILE).

Amazingly, Metromile’s car-mounted precision sensors have transferred data from more than 400 million road trips. The data collected from those sensors were “cross referenced with actual claims data, yielding precise predictions for losses per mile driven,” according to Lemonade.

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Lemonade is discussing its competitor’s technology because Lemonade is going to acquire that competitor.

Lemonade’s deal to acquire Metromile is clearly a value-added investment for Lemonade, as Metromile held 49 state licenses and $250 million of cash on its balance sheet as of November 2021.

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With justifiable confidence, Lemonade co-founder and CEO Daniel Schreiber called the acquisition  “a huge unlock of value” for his company’s customers and shareholders.

The Bottom Line

Lemonade provides a broad range of insurance offerings that are enabled by technology.

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In the area of car insurance, the Metromile acquisition (if and when it closes) should make Lemonade an even greater threat to traditional automotive insurers. And when it comes to dogs and cats, Lemonade’s insurance products are becoming increasingly accessible in the U.S.

So don’t call LMND stock a loser just yet. As reluctant investors learn about Lemonade’s transformative insurance technology, they may soon be thirsty for more of its shares.

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On the date of publication, David Moadel 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.

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