Why Shares of Lemonade Stock Fell This Week
Key Points
Lemonade reported more strong growth in the first quarter.
It is still disappointing shareholders because of its lack of profitability.
The stock looks expensive when valued as an insurance provider.
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Shares of Lemonade (NYSE: LMND) dropped 13.8% this week, according to data from S&P Global Market Intelligence. Releasing earnings on Wednesday, the insurance upstart posted strong growth but continues to miss on profitability, which likely led investors to sell some shares. Despite this week's drop, the stock is still up roughly 100% in the last twelve months.
Here's why Lemonade stock fell this week, and whether investors should buy the dip.
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Strong growth, missing profitability
Lemonade is a new insurer that focuses on being a digital-first provider, utilizing artificial intelligence (AI) to price plans and lower overhead costs. It offers rental, homeowners, and car insurance, but pet insurance has been the niche where Lemonade has grown the largest, crossing $500 million in premiums last quarter.
Premiums -- which can be thought of as a topline figure for insurance providers -- jumped 32% year-over-year in Q1. Total customers also grew 23% year over year, surpassing 3 million for the first time.
Where Lemonade is lacking is profitability. It posted a net loss of $36 million last quarter and $139 million over the last twelve months. This figure has improved in recent years, but even with billions of annual premiums and 3 million customers, Lemonade has still missed the mark in getting its income statement into the black.
Image source: Getty Images.
Time to buy the dip on Lemonade stock?
Insurance companies are usually valued on book value, similar to a bank. The most profitable insurance providers will trade at a higher price-to-book (P/B), meaning they can earn more each year from the capital on their balance sheets.
Lemonade trades at a premium P/B ratio of 8.4 despite it never turning a profit. This makes the insurance company highly risky, despite its consistent boasts of fast topline growth. Avoid buying the dip on Lemonade stock after this week's price drop.
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Brett Schafer 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.
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