New Trade for August 7th 2020

Futures are pointing to a lower open this morning after the three major indices closed higher yesterday.  Once again, tech lead the way with the Nasdaq up 1%.  

Today we are looking at a company which just had its IPO in July.  Since then the price has fluctuated due to speculation about the company’s growth prospects.  Let’s take a look at what the company does and then we will explore valuation.  

Lemonade (LMND) is a next-generation property and casualty insurance carrier who aims to “harness technology and social impact to be the world’s most loved insurance company,”  according to the company’s website.  LMND IPO’d on July 2nd at a target price of $29.  The share price has seen plenty of volatility since then, climbing to a high of $96 and is currently trading at ~$68.  

According to the company’s S1: “70% of our current customers are under the age of 35.”

LMND’s model is so popular amongst  millennials because its business model is designed to pay client claims within minutes. If Lemonade can retain and grow its millennial customer base, the company will benefit from the assets millennials will accumulate over their lifetime.  With more expensive assets comes higher premiums.   

 The company has 2 AI bots who interact with customers to price premiums and pay claims.  In fact, management brags that its bots pay out roughly 33% of its total claims within 3 seconds of submission.  The company enjoys lowered administrative costs and expenses associated with pricing premiums and paying out claims.

As of now, Lemonade operates in the Home and Renter’s Insurance space and recently opened up to pet insurance.  Its currently licensed to operate in 40 states and operated in only 28 of those states so there is room to grow domestically.  As for overseas expansion, the company holds a pan-European license, enabling access to 31 European countries.  The expansion is expected to continue over the years along with product expansion.  

Placing a valuation on a high growth company like Lemonade comes down to how much one believes in the business model.  Strong upside potential is there, but there is still uncertainty about how the company will scale and become profitable.  As of now, LMND stock seems to be cooling off since its IPO, so more pullback could be in order.  However, we think LMND is a very intriguing growth opportunity for long-term investors.