Shares Lemonade (NYSE: LMND) It plunged 40 percent in February, according to data from S&P Global Market Intelligence. The top-flight insurer, trying to disrupt the legacy market, posted fourth-quarter earnings that disappointed investors. Shares of the stock are still up nearly 70% over the past year, marking a major rally for Lemonade shareholders.
Here’s why stocks plunged in February, and whether now is a good time to buy the dip for your own portfolio.
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Lemonade sought to disrupt traditional consumer insurance markets such as renters, home, and auto insurance through a convenient online platform. With lower overhead costs, the company believes it can offer insurance rates lower than the competition and still generate profits.
So far, it has been able to use its low prices to attract customers to its services. In-force premiums — a headline metric for an insurer like Lemonade — totaled $1.24 billion last quarter, up 31% year over year. More customers are joining Lemonade for its various insurance offerings, driving strong top-line growth.
The problem is that the company failed to turn this premium into profit, with a net loss again in Q4. Management claims this is due to its reinvestment for growth, but investors are concerned that it is gaining market share without actually establishing sustainable insurance operations.
What’s more, Lemonade’s valuation was higher after its Q4 earnings report, with a price-to-book (P/B) of 14. It’s the best metric for valuing an insurance carrier, and it’s very premium. As of this writing Lemonade is still trading at a P/B of 7.9.
After falling 40%, Lemonade is trading at a cheap, but still not cheap, 7.9 P/B. The company has consistently lost money on book value over the years, but it bucked that streak last quarter, with book value per share falling instead of falling. If it turns around and the company starts generating additional capital, perhaps the business will start generating value for shareholders.
Lemonade is a fast-growing business, and if it can maintain that rapid growth and exhibit some level of operating profit, the stock may be a buy today. However, the shares still trade at a premium compared to the rest of the insurance market. For Example, developed It trades at a P/B of 4.1, making it the best operator in the industry. Lemonade remains a risky stock to add to your portfolio right now.
