Down 86% from its peak, is now a good time to buy lemonade stock?

Jhe past year has not been kind to growth stocks. For example, Cathie Wood ARK Innovation ETFa fund that seeks to invest in the most disruptive and innovative companies, is down about 57% from all-time highs reached in February 2021.

The decline was even more pronounced for young public companies that have yet to make a profit. Lemonade (NYSE: LMND) is one of those growth stocks and its price is down significantly. Since peaking in January 2021, this innovative insurer’s share price is down 85.7% and can be bought for around $27 a share.

With the stock so low, is it a good time to buy some lemonade?

Image source: Getty Images.

This fintech is shaking up the way insurance is done

Lemonade is an insurer looking to revolutionize the insurance industry. The company is focused on streamlining the insurance buying process. To do this, it uses big data and artificial intelligence.

For example, its chatbot, AI Maya, can help customers get policies by asking just 13 questions. However, from these 13 questions, it can generate 1,700 data points to analyze. The company generates many data points by recording every aspect of a customer’s interaction on its website.

Lemonade is focused on getting younger customers like Millennials and Gen Zers and turning them into customers for life. In the past year, he has grown the business by leaps and bounds by aggressively adding customers.

Lemonade’s rapid growth over the past year has come at a cost

The company has been spending heavily on digital advertising while increasing its product offering and geographic footprint. As a result, Lemonade increased its number of customers to 1.4 million, up 43% from the previous year. It also saw premiums in force, or the dollar amount of active policies, at $380 million, up 78% from a year earlier. This resulted in strong revenue growth of 36% during the year.

While the company grew rapidly, it also saw its net losses balloon over the year. The aggressive ad strategy boosted sales and marketing spend 76% to $141 million. The company also saw losses on its policies increase, with losses and claims expenses totaling $17 million and $72 million, respectively. As a result, its net loss during the year was $241 million, following its net loss of $122 million in 2020.

Losses increased as Lemonade added new product offerings

Last year, Lemonade’s net loss ratio was 93% after posting a 71% loss ratio in 2020. The net loss ratio is a key metric used by insurers that measures loss and expense claims paid less the amount ceded to reinsurers divided by the net premium earned. . The company’s long-term goal is to keep this metric below 75%.

The losses can be attributed to several things. On the one hand, Lemonade suffered significant losses in early 2021 due to winter storms in Texas and Oklahoma – which caused nearly $7 million in losses. It also saw an unfavorable development from the prior period for older losses for which it was underbooked.

Management explained to investors that these larger losses were partly due to the company’s new product offerings, including insurance policies for owners and pets. Prior to 2021, two-thirds of the company’s policies were tenant policies. However, with the expansion into new insurance products, tenant policies now make up less than half of its portfolio. As a result, the company will incur greater losses on new products as it learns to properly balance risk and pricing policies.

LMND Earnings Chart (TTM)

LMND (TTM) Revenue Data by YCharts

A stock with high growth potential but also high volatility

Lemonade is an intriguing stock that is rapidly growing its customer base with new products. This year, management expects in-force premiums to be around $530 million and $540 million, while revenue is expected to increase by 58% to 60%.

However, beating traditional insurers at their own game is not going to be easy, and further growing pains can be expected. As Lemonade expands into auto insurance, the losses will continue to mount until it accumulates the data and knowledge needed to price policies effectively. Management expects adjusted EBITDA losses of $290 million to $275 million as a result.

Although Lemonade offers investors high growth potential, it will continue to experience volatility until its loss ratios approach management’s target, making it a stock best suited for investors in growth with a high tolerance for risk.

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Courtney Carlsen has no position in the stocks mentioned. The Motley Fool owns and recommends Lemonade, Inc. The Motley Fool has a Disclosure Policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.