Thursday, November 30, 2023

Lemonade Stock (NYSE:LMND): A Potentially “Perfect” Speculative Opportunity

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By most measures, insurance company Lemonade (NYSE:LMND) seems too risky. Nonetheless, for risk-tolerant investors, LMND stock could potentially be a “perfect” speculative wager, given its ability to thrive in various economic scenarios, along with its support from analysts and hedge funds. Leveraging the power of artificial intelligence to offer critical insurance coverage through a convenient app, Lemonade contrasts sharply with its traditional rivals. Still, with a few tweaks, LMND stock could be worth purchasing.

To be fair, LMND won’t be an ideal stock for everyone. Perhaps most glaringly, shares gave up 50% of their value in the trailing year. No matter how an optimist might frame this erosion, good companies don’t suffer this magnitude of loss without reason. Further, while the company’s earnings performances have been decent relative to expectations, the issue is the numbers themselves: they consistently slip into negative territory.

Nevertheless, Wall Street analysts remain hopeful about LMND stock. At the very least, they’re willing to exercise patience with the underlying enterprise. It’s easy to come to that conclusion, given that the present average LMND price target implies strong double-digit upside potential.

Sweetening the pot for LMND stock, hedge fund sentiment rings “positive,” according to TipRanks. Since the first quarter of last year, these institutional investors have been building up their position in Lemonade shares. That’s particularly encouraging for prospective buyers for two basic reasons: first, hedge funds have access to the best resources and market analysts, and second, they’re not in the business of losing money.

LMND Stock Plays the Role of Switch Hitter

In baseball, a switch hitter represents a player skilled enough to swing the bat with either hand. Essentially, the goal is to create favorable matchups depending on the dominant arm of the opposing pitcher. In many ways, Lemonade can effectively accommodate whatever economic cycle the Federal Reserve catalyzes, making LMND stock surprisingly viable.

Should the Fed continue to raise interest rates throughout 2023, Lemonade, as an insurance provider, may organically mitigate the storm. Fundamentally, insurance providers feature inelastic demand; that is, irrespective of pricing differences, demand should remain consistent and, therefore, predictable. If anything, the post-pandemic period may bolster demand for various insurance products.

Basically, what COVID-19 proved was that no economy – no matter how massive – is safe from acts of God. Therefore, people may be more receptive to protecting their financial interests, and demand for insurance coverage may increase, which broadly supports LMND stock.

Also, even if monetary policy swings in the other dovish direction, Lemonade may still come out as a winner. That’s because lower borrowing costs should boost consumer sentiment toward big-ticket items such as motor vehicles and homes, and if people take the plunge on said items, they’ll have every incentive to protect their acquisitions.

Moreover, Lemonade caters to young users, specifically millennials and members of Generation Z. Growing up on digitalization platforms, people in these age cohorts would prefer the Lemonade app over traditional (“analog”) mechanisms. Therefore, just based on demographic realities, LMND stock might come out ahead.

Finally, Americans’ love for their pets also bolsters the tech-based insurance provider. Currently, the company offers programs to cover dog and cat owners. From practically any angle, LMND stock delivers significant relevance.

Is LMND Stock a Buy, According to Analysts?

Turning to Wall Street, LMND stock has a Moderate Buy consensus rating based on two Buys, three Holds, and zero Sell ratings. The average LMND price target is $26.40, implying 59.4% upside potential.

There are Encouraging Signs, but Lemonade Will Need Some Work

While the fundamentals bring encouragement for the stock, Lemonade’s underlying financials will need some shoring up. Problem number one is that the company continues to lose money. In 2021, Lemonade posted a net loss of $241.3 million. For the trailing 12 months, its net loss sits at $304.4 million. Until the firm generates positive earnings, it’ll be hard to compete in the insurance segment.

Nevertheless, Lemonade is also a work in progress. On a per-share basis, the company’s three-year revenue growth rate stands at 59.6%, beating out over 96% of the competition. In addition, sales more than doubled year-over-year in the third quarter of 2022. This performance indicates that the insurance app is catching on with its core user base.

The Takeaway

Continued effort should make LMND stock more enticing later this year. Best of all, it probably doesn’t matter what happens to the economic framework (short of an apocalyptic scenario). Lemonade looks fortuitously equipped to handle whatever comes its way, and analysts forecast solid upside potential ahead.


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

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