Lemonade today
(As of 12/06/2024 ET)
- 52 week range
- $14.03
▼
$53.85
- Target price
- $30.43
While the industry isn’t typically described as “hot” or “innovative,” those two words can definitely describe parts of the insurance industry in 2024. Among the 80 largest insurance stocks traded on U.S. exchanges, only two have negative total returns this year. year. On average, these stocks returned 57% as of the close on Dec. 4, outperforming the S&P 500 index.
One company that has had a particularly good year is Lemonade. New York Stock Exchange: LMND. The stock was up 186% as of the December 4 close. So, what has the market so excited about Lemonade this year? I’ll let you know what makes this insurance company different and answer that question. Finally, I’ll give my opinion on the future of financial services stocks.
Lemonade: bringing innovation to a century-old industry
Lemonade has become known for introducing the most talked-about technology in insurance in recent years: artificial intelligence. Despite the artificial intelligence arms race among hyperscalers investing billions in developing the technology, analysts sometimes have a hard time identifying the tangible benefits that artificial intelligence creates. Personalized advertising powered by companies like Meta Platforms. NASDAQ: META and AppLovin NASDAQ: APPis one of the striking examples.
Insurance makes a lot of sense as another area where AI can be very useful. Insurance is about analyzing large amounts of data. By analyzing historical data, insurance companies try to accurately determine the likelihood of an insured event occurring. It also helps determine how much they will have to pay if a claim arises. Insurance companies know that they will have to pay out some amount of money on claims. But their goal is to collectively charge more in premiums and deductibles than they pay out in claims. This is how they make a profit.
They also need to maintain competitive rates so that customers buy insurance from another insurer. Calculating the correct amount to charge based on these competing priorities requires data analysis. This is where AI comes to the rescue. Using AI could allow insurance companies to better calculate what they need to charge, maximizing profitability and potentially offering lower rates than competitors. This is a big part of how Lemonade uses AI.
In addition to helping set prices, Lemonade also uses AI to reduce its internal costs. The company sells 97% of its policies and pays 55% of claims without human intervention. This has helped the company increase operating bonuses by 25% per year since 2021, while increasing headcount by just 2% per year. These factors show that the use of AI can indeed become a huge advantage in the insurance industry.
Recent earnings and Investor Day send markets down
Lemonade shares have fluctuated fairly moderately for most of the year. But they began to skyrocket after the company released earnings for its fiscal third quarter on Oct. 30. Since that date, shares have risen 146% as of the December 4 close. Revenue growth of 19% was well above expectations, and the company’s gross profit was up a staggering 8% year over year. If the fourth quarter goes as expected, the company will achieve positive net cash flow for the full year, which is a major achievement.
The markets also clearly liked what they heard at Lemonade’s Investor Day on November 18th. In the two days following the event, shares rose 47%. The company has set an ambitious goal to increase the size of existing premiums from $1 billion to $10 billion. It is expected to grow at about 30% per year, reaching this target in eight to nine years.
Lemonade, Inc. Price Chart (LMND) on Sunday, December 8, 2024
Lemonade: Great business, but the price currently looks high
Overall, I have a lot of faith in what Lemonade is doing from a business standpoint. In my opinion, legacy insurance companies should be wary of companies like Lemonade that are truly innovative. I see Lemonade reaching its $10 billion goal. However, that doesn’t mean Lemonade’s value isn’t off the charts right now. Lemonade certainly looks expensive when you look at a few valuation ratios for the 80 insurance stocks mentioned above. Its forward sales multiples are higher than 89% of these stocks.
Lemonade appears to be a stock with extremely high expectations right now. I wouldn’t be surprised if this causes the stock to drop significantly in its next earnings report. Wall Street analysts might say the same. The average price target indicates significant downside potential. Despite this, I still think Lemonade is a company that can be a big winner in the long run.
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