After Tesla’s stock surged tenfold around 2020, a friend asked me what I knew that others didn’t. It’s a bit complicated to explain, but a similar opportunity might arise with Lemonade Insurance in the next 3-4 years. The current situation is a combination of a very promising business and a suppressed stock valuation, mostly by external factors.
I’m open to the possibility of being wrong, and I acknowledge the inherent risks of stock-picking (there’s a note on stock-picking at the end of the document). I’m sharing my thoughts here partly to invite others to point out potential risks I might be overlooking. And of course, none of this is financial advice in the legal sense.
Preview of the main points
Lemonade’s Growth: Regardless of stock price fluctuations, customer base and In Force Premium have significantly increased.
AI Play: Leveraging modern IT with heavy AI use for efficient client servicing and claims processing gives them a competitive edge. Perhaps counterintuitively, I consider the company one of the best AI (not AGI) plays on the market for the next three or four years.
Market Potential: Insurance is a vast market, with Lemonade’s full product line enabling effective cross-selling. They only need a modest market share to succeed big.
Valuation: The stock is considered undervalued by most people who took the time to look into it, especially in comparison to its IPO price and given recent growth and funding activities. Also based on the price-to-book ratio.
Risks: Weather-related events and broader market conditions pose risks, though mitigated by strategic decisions and reinsurance.
Timing
One of the hardest aspects of investing is timing. The stock can rally after the next earnings report – scheduled for February 27, or it can remain suppressed for another four quarters. I think there is a chance the stock can move after one or two good quarters. Just keep in mind that the progress can be interrupted by higher loss ratios due to bad weather (or other risk factors).
To learn more, check the Resources section in the doc. And feel free to comment here or directly in the doc.
I’ve been satisfied with their services so far, and I won’t object if the chunk I tossed into investing in them recovers, as long as it doesn’t do so by interfering with their services.
Nice write up. Read through the google doc and as someone who is new-ish to investing, the content was very accessible to me.
I like your probability based expected-value calculation. Assuming the investment goes well (this or maybe some other stock), what is your strategy to dilute the investment? i.e lets says it becomes 5x and the fundamentals are still good, I assume you wont sell 100% of your investment. Would you encash just 20% or 50% of the stock? What is the model there?
A brief earnings update:
The Q4 results were very good, esp. profitability—adjusted EBITDA was much better then guided for.
The loss ratio of 77% was a huge improvement (12 pt. YoY), however I was expecting even better, perhaps 75% or less.
The main issue is relatively weak 2024 guidance. They expect to grow in-force premium (annualized insurance fees) about 26% by the end of the year. I was expecting much faster acceleration of the growth, closer to 35 or even 40%.
Another mild negative is their cautious communication about loss ratios in Q1 and Q2 (seasonality).
LMND is a small cap and therefore it’s a playground of traders and short seller. The stock is now down about −27% basically deleting the huge gains of the past two weeks. Classic “buy the rumor, sell the news” situation.
Given the slower planned growth there is perhaps less urgency in building a position. However the current price seems attractive long term.
Check out ROOT stock yesterday. A car insurance company went up 53% after earnings. I’m not saying Lemonade will do the same next week after it reports earnings (on Tuesday), because their situation is quite different, and there is always uncertainty. However it’s a hint about the likely direction of the move, because there is one commonality: inflation going down and rates getting approved.
If you look at some large insurance companies, and what their stock was doing last 6 months, you can see a big uptrend. For example Progressive (PGR), Allstate (ALL), The Travelers Companies (TRV).
The main reason is probably inflation coming down. In the U.S. insurance is very regulated, every increase in insurance rate has to be approved. When inflation was high the rates became inadequate and regulators took many months to approve the rates. Now inflation is much lower and the fillings mostly went through, that’s why all insurance companies have much better profits recently. Another reason is there were very few catastrophic weather events in Q4 (evident from the reports of several insurance companies which already published Q4 results).
I think this is a big factor that I didn’t sufficiently explain in my post.