Is Lemonade a Buy After Morgan Stanley's Upgrade?

On March 17, Morgan Stanley upgraded Lemonade (NYSE: LMND) from equal weight (hold) to overweight (buy) and boosted its price target on the stock from $80 to $85.

By the end of the day, that was enough to send shares of the digital insurance company 15.8% higher from its March 16 closing price.

Today, we'll look at the reason for this upgrade and what it means for investors.

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The autonomous insurer

Morgan Stanley's upgrade was based on Lemonade's early-mover advantage in autonomous vehicle insurance, so it's important to have some context for that market.

Even though they're not mainstream yet, self-driving cars are a fast-growing sector and will become more commonplace in the years ahead. Grand View Research projects the global autonomous vehicle market will climb in value from $68 billion in 2024 to around $214 billion by 2030.

What that also means is that there will be a growing market to insure those vehicles.

In January, Lemonade launched autonomous car insurance, calling it a "first-of-its-kind product," starting with Tesla's full self-driving (FSD) system.

As the company explained:

The new offering cuts per-mile rates for FSD-engaged driving by approximately 50%, reflecting what the data shows to be significantly reduced risk during autonomous operation. Lemonade expects further reductions as Tesla releases FSD software updates, which are anticipated to make the cars even safer over time.

Lemonade can access Tesla vehicle data with a customer's permission and then use that data in its risk-prediction models.

The investing takeaway

One analyst upgrade alone doesn't make a stock worth investing in. Still, for Lemonade in particular, this one was a powerful recognition from one of the world's largest investment banks that it sees the value in its business strategy.

This particular tactic of taking in granular data about when Teslas are in self-driving mode to offer discounted rates to their owners dovetails well with Lemonade's digital-first, lower-cost brand identity, and should give it an early edge in the self-driving car insurance market.

That's the potential, but it's important to keep in mind that this is new territory, and that any business innovator will encounter bumps along its journey.

Lemonade is not profitable, and as I write this, the stock price is around $5 below its 2020 debut closing price of $69.41. It is, however, up considerably from where it traded during 2022 and 2023, when it generally lived below $25 per share. That reflects the simple truth that this is a young business. Its shares are likely to remain volatile.

There's still significant upside potential here, especially given Lemonade's new ability to use Tesla vehicle data to deliver more efficiently priced policies for their owners. However, it's also a speculative investment, and every potential shareholder should treat it as such.

Jack Delaney has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lemonade. The Motley Fool has a disclosure policy.