To say that Lemonade (NYSE:LMND) has gotten off to a hot start after its initial public offering (IPO) is the definition of an understatement. The digital insurance company has seen its shares climb over $90 per share off an initial IPO price of $29 per share.
Stocks are notoriously volatile coming off their IPO. And Lemonade is in its quiet period right now. That means investors won’t be getting information from the company itself. But with such a fast run-up, is Lemonade stock still a buying opportunity?
The company is disrupting an industry that was in need of some disrupting. But is speed and a social conscience enough to justify the stock’s current price?
Lemonade Makes the Complex Simple
Some investors would say that the element of Lemonade that they love is the company’s focus on artificial intelligence (AI). That’s impressive for sure. But the immediate thing I love about Lemonade is that it strives to make the complex simple.
At any given time, many of us have felt that insurance is needlessly confusing. After all, it seems like a simple enough transaction. We pay a premium to get insured (hoping we’ll never need it) and when we need to file a claim we get our money promptly.
But unfortunately, too many customers realize that’s not the way insurance actually works. Let’s keep our focus on homeowers and renters insurance because those are the two areas that Lemonade covers at this time.
If we pay a higher premium, we don’t get our claims paid any faster. And if we opt for a lower premium, we get less coverage. And we still don’t get our claims paid any faster. Even when we win, we kind of lose.
Lemonade Offers a Win-Win
That’s the win-win of Lemonade. Because they use artificial intelligence, they can offer customers lower premiums that, ostensibly, don’t limit their coverage options. But second, because the company takes a flat cut off their customer’s premium, the rest of it is in a pool with other policyholders’ premiums and is readily available to pay claims.
Plus, the company has a unique charitable component that is very appealing to the young demographic that, for now, makes up its customer base. Whatever is left over in the pool does not go to the company by way of profit but gets paid out to charities of the customer’s choosing.
The thinking is that the customers have an incentive to not file frivolous claims because it would take away from their charities. It’s an interesting strategic decision in the times we live in. Many investors have a social conscience and with that in mind may be willing to reward Lemonade at the expense of earnings.
But that remains to be seen because Lemonade is not yet profitable.
Will Lemonade Branch Out?
When the company filed for its IPO, it was considering selling life insurance. That will be a story for investors to watch. If it does, it will increase the addressable market.
However, at this time, Lemonade is only competing in the areas of homeowners and renters insurance. That doesn’t make the stock a bad investment, but it does confirm, at least for me, that the stock is overheated at this time. Renters insurance can be an area of high churn. Right now, we don’t have that information from Lemonade.
And right now, because the product offering is limited, Lemonade can’t offer customers bundled savings. Is that important? We’ll find out.
Lemonade Stock Is Overvalued But Bears Watching
Due to the interest in Lemonade’s IPO, the company’s market capitalization has surged. At the time of this writing, it was up to $4.65 billion. But Lemonade has no earnings yet. So, based on Lemonade’s 2019 revenue of $67 million, the stock has a price-sales ratio of 69.
That’s not totally unusual for a stock that’s being publicly traded for the first time. But it does suggest that buyers may want to wait for Lemonade stock to cool.
Lemonade is a stock I’m planning to watch very closely. The model is one that is too compelling to ignore. But insurance is all about managing risk, and my assessment of risk doesn’t mean I need to buy Lemonade stock at a PS ratio of 69.
Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019. As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.