No topic in the investment community has gotten more attention in the past couple of years than the rise of artificial intelligence (AI). Executives in a range of industries are trying to harness this technology to their benefit, while investors aim to position their portfolios to capture any upside.
Lemonade (NYSE: LMND), the AI-powered insurance platform, isn’t new to this breakthrough tech shift. Since its founding in 2015, it has leveraged machine learning and AI to offer various insurance products to customers.
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But while this fintech stock has surged 126% in the past three months (as of Dec. 17), it still trades 76% below its peak. If you want to buy Lemonade when it’s down, it’s important to know these three things first.
As an earlier-stage and tech-driven enterprise, Lemonade has posted solid growth, which shouldn’t be a surprise. In the third quarter (ended Sept. 30), the company generated $137 million in revenue, which was up 19% year over year. The current customer base of 2.3 million is 17% higher than it was just three years ago.
Last month, the leadership team revealed an ambitious goal for Lemonade to target over the long term. They hope to go from $1 billion in premiums in the fourth quarter to $10 billion “in the coming years.”
Looking ahead, Lemonade’s most promising growth opportunity comes not only from adding new customers, but from cross-selling them other insurance products. By attracting a younger demographic, Lemonade can sell more over time as these customers get older and reach life’s various milestones, like buying a car or a house.
The company’s past growth has been notable, but it’s hard to overstate how competitive the industry is. Major insurance providers, like State Farm, Allstate, and Progressive, all have longer and more successful operating histories than Lemonade does. What’s more, they have all been investing heavily in their own tech and digital capabilities.
From a legal standpoint, Lemonade isn’t like most businesses out there. That’s because it’s a certified B corporation. In addition to focusing on its shareholders, this means that Lemonade emphasizes social and environmental factors. It holds the business to a higher standard in terms of accountability and transparency. Given that there are only 2,500 or so B corporations in the U.S., Lemonade is in a small group.
While it doesn’t cost anything to become certified, Lemonade has taken the added step of creating a Giveback program. Once per year, any money that’s left over after Lemonade takes a fee and all claims are paid goes to a cause that the customer chooses. In 2024, 43 non-profit organizations will be supported to build homes, plant trees, and provide emergency food, among other activities.
This strategy can undoubtedly be viewed as a positive factor that could draw in more customers who believe in what Lemonade is doing. However, I can also see how this might turn some investors off if they think it’s a distraction or a marketing tactic, especially when you consider that Lemonade isn’t profitable.
Investors looking to buy and hold businesses for five years or more should identify the presence of an economic moat, which helps to protect against the threat of competitors and new entrants. It’s likely that due to its young history and small scale, Lemonade doesn’t possess a moat yet.
Its brand might still be relatively unknown on a bigger stage. The company’s ability to collect data doesn’t match that of its larger peers, and its size doesn’t allow Lemonade to benefit from cost advantages.
This just makes owning Lemonade riskier, as any competitive threats could derail the company’s growth trajectory in the absence of a moat. Maybe if the business can continue scaling up as management hopes, this will change. Time will tell.
Investors looking to buy Lemonade shares on the dip are now familiar with its growth outlook, B-Corp status, and competitive standing.
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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lemonade and Progressive. The Motley Fool has a disclosure policy.
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