Lemonade Inc. (NYSE: LMND) Shares Double on IPO Day: Believe the Hype?

Monday, July 6, 2020 | Sean Sechler
Lemonade Inc. (NYSE:LMND) Shares Double on IPO Day: Believe the Hype?

When was the last time you heard an insurance company described as “cutting-edge”? Insurance stocks are known for being steady and safe for investors since they typically provide gradual returns along with dividends over the long run. However, a new tech-centric insurance company that debuted with an Initial Public Offering (IPO) last week doubled in value on its first day of trading and is attracting a lot of attention.

Lemonade Inc. (NYSE:LMND) debuted last week at an IPO price of $29 per share and rocketed 139% higher during its first trading session. The stock is up big on its second trading day too and has been the most successful IPO this year. Lemonade uses artificial intelligence and big data to make the processes of buying insurance and filing insurance claims more efficient and user-friendly. Investors are recognizing the potential that this company has to disrupt the insurance industry, but has the stock gone up too far too fast? Let’s take a deeper look at Lemonade Inc. and determine whether or not investors should believe the hype.

Next-Gen Technology

Part of Lemonade’s IPO success has to do with the bullish momentum in the overall market, but you can’t deny the fact that this company is creating something unique. The insurance industry in the U.S. has been a huge marketplace for decades, but many of the legacy IT systems that these companies use slows them down and detracts from the client experience. Lemonade’s founders recognized the opportunity to introduce next-gen technology into the industry and took action.

The idea behind Lemonade’s business is to use artificial intelligence to replace brokers entirely and allow homeowners and renters to get insurance without having to spend time filling out paperwork or dealing with salesmen. With Lemonade’s AI Maya, customers engage with a virtual assistant that helps to collect information, gather insurance quotes, and process payments. The company claims that it will take roughly 2 minutes to get a renters insurance quote and 3 minutes for homeowners insurance quotes. Claims can be paid out in as little as 3 seconds, which is blazing-fast for the industry and something that traditional insurance companies can not offer at this time. Lemonade offers policies on a monthly subscription basis and customers can pay as little as $5 a month for coverage.

Targeting Younger Generations

The ideal target market for Lemonade at this point is younger generations that grew up using smartphones. We know that traditional insurance companies can be slow and tedious to deal with, which is why Lemonade has built a business model based on attracting millennials and Generation Z. The company stated that 70% of its customers are under the age of 35, which speaks volumes about who is interested in Lemonade at this time.

By going for first-time customers with little assets, the company has been able to grow revenue figures nicely from $22.5 million in 2018 to $67.3 million in 2019. With that said, Lemonade will have to work hard to capture older customers that maybe aren’t as comfortable handling major financial tasks using their digital devices. If the company is eventually able to find a way to tap into older age groups, the sky is the limit. 

A Good Cause

Another way that Lemonade offers a unique business model is by including a social advocacy component into every transaction. In fact, the company is set up as a public benefit corporation, or B corp. When a new customer signs up for Lemonade, they name a charitable organization in which the company donates money from residual premiums to. This initiative is known as “Giveback” and could absolutely work in the company’s favor as it grows.

Traditional insurance companies profit by keeping any money that isn’t paid out in claims. With Lemonade, the company charges a fixed fee and uses the rest of the money to pay claims. Any leftover money remaining after the claims have been paid goes to charitable causes. We know that younger generations tend to be interested in supporting positive social change, which is why this aspect of Lemonade’s business seems to fit perfectly into its business model at this time. 

Be Careful

This stock is absolutely the most impressive IPO of the year thus far, but that doesn’t mean this type of market performance is sustainable. While Lemonade offers a unique business model and a cutting-edge application that has the potential to disrupt the insurance industry, new investors should be extra careful if they are looking to buy at current price levels.

Keep in mind that new IPOs are known to be quite volatile during the first few weeks of trading. We simply don’t know that much about this company’s financials due to its limited operating history, which means that there could be significant risk in the near-term based on its current valuation. Sitting on the sidelines until a more attractive entry point presents itself is probably the right call for this red-hot stock. 

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Companies Mentioned in This Article

CompanyMarketRank™Current PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
Lemonade (LMND)0.9$104.75-1.3%N/A-27.93Hold$88.57
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