Insurance + AI = Massive Upside?

There hasn’t been a start to the year as bad as this one since 1970. By June, the market had officially slid into bear market territory.

But among the laundry list of lemons, one compelling buy candidate now is Lemonade (LMND), a growth stock that fell out of Wall Street’s favor and collapsed from all-time highs of $81.68 per share to a recent 52-week low of $15.99 per share.

Now that it’s hovering near the lows, will Lemonade soar higher, and if so when?

Insurance + AI = Lemonade

Lemonade is an insurance company driven by artificial intelligence. The AI is applied not only to the pricing strategy policy but also to improve customer experiences, which are widely regarded as stellar.

Now serving 1.58 million customers, Lemonade is gaining momentum. New customers benefit from the website’s ease of use – they can receive a quote in less than 90 seconds. 

An AI-powered bot that Lemonade calls Maya delivers pricing quotes to customers. 

Paying policyholders can also interact with Maya. For example, when insurance claims are made the bot is capable of paying them out in as few as three minutes — no human interaction is required.

Currently, Lemonade offers insurance across renters, homeowners, car, and pet insurance markets. The company is experiencing high customer growth and has seen policies increase thanks to a combination of both upselling and cross-selling.

The company’s most recent quarter was one of its best yet, but there are still risks. So, what does that mean for the future of Lemonade’s stock?

New AI Model Leads To Huge Revenue Spike

In Q2 2022, Lemonade announced its latest and most advanced AI model yet. This model is called LTV6 and is used to determine the lifetime value of a customer based on several variables, such as their likelihood of making a claim or switching to another provider.

Based on that information, Lemonade can more accurately price premiums. This model can also detect inefficiencies, such as identifying insurance markets and geographic areas that may underperform.

The efficacy of this model was apparent in the company’s Q2 results when revenue skyrocketed by 77%, reaching $50 million. 

Lemonade’s in-force premium (IFC) hit $458 million, up 54% year over year, and the company’s customer base grew by 31%. 

Both top and bottom lines were ahead of expectations, showcasing a clear path to profitability. 

As a result, the price of LMND shares rose from around $28 per share on August 9 to over $32 by August 12. Prices have since mellowed out, creating a possible buying opportunity for investors willing to ride the turbulent share price swings. 

The Worst Might Soon Be Over

One of Lemonade’s most significant headwinds is profitability, or lack thereof. In the first half of 2022, Lemonade had a net loss of $143 million. 

Although another quarter in the red is concerning, this loss correlates with Lemonade’s investment in growth. Lemonade’s most recent venture into car insurance might be the company’s most lucrative yet. 

Before purchasing Metromile in July, the company made around 1% of its revenue from Lemonade Car. Following this acquisition, the company expects to generate about 20% of its revenue from this segment.

The company’s most recent shareholder letter said, “we expect returns from earlier investments will soon outstrip costs of new ones. Accordingly, peak losses are expected this quarter (Q3 22), and EBITDA is expected to improve thereafter, through to profitability.“

The woes among analysts are not limited to profitability. Retention, lack of insider confidence and competition are all legitimate concerns. So, what does all that boil down to for prospective buyers?

Is Now The Time To Buy LMND?

Over the past year, shares have dropped by over 70%. The stock’s 52-week low was $15.99 per share, and although that would have been a potential steal, the stock’s current price is still very tempting.

Lemonade has only recently embarked on its journey into the $300 billion car insurance market — 70 times the size of the pet or renters markets. Over the next decade, Lemonade’s stock could perform much better.

If you are a risk-averse investor, this isn’t the stock for you. Lemonade still has some growing pains to work through. However, the company has enormous potential. So, those who buy now and hold long-term could win big in the coming years.