1 Magnificent Growth Stock Down 72% to Buy and Hold Forever

Key Points

• Lemonade's growth is accelerating while losses are narrowing.

• The loss ratio has declined significantly.

• Management sees the opportunity to increase in-force premium 10-fold.

• 10 stocks we like better than Lemonade ›

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Insurance company Lemonade (NYSE: LMND) had an amazing week after releasing its second-quarter earnings, and it's already jumped 38% since the announcement. However, it's still 72% off of its highs from a few years ago, and there are many reasons it could continue to soar.

The model is working

Lemonade is a different kind of insurance company that was built on a digital substrate and uses artificial intelligence (AI) and machine learning to price policies effectively. It's been at it for a decade now, and although it has demonstrated growth and potential from the beginning, its model is finally demonstrating real effectiveness.

Management has said repeatedly that the model works better over time as it has more data and its algorithms improve. As AI has exploded during the past few years and the technology keeps getting better, Lemonade's investments are paying off.

Image source: Getty Images.

The results it reported in the 2025 second quarter were nearly flawless, with accelerating growth and narrowing losses. In-force premium (IFP), the top-line metric for insurance companies, increased 31% year over year to more than $1 billion, and customer count increased 25% to almost 2.7 million.

The net loss has been a drag, but it narrowed substantially, from $57 million last year to $44 million this year. Notably, its operating expenses have remained little changed while IFP continues to climb, indicating that this could be hugely profitable at some point. Right now, it still has large marketing expenses and investments in the platform.

The loss ratio -- or claims paid as a share of premiums -- has also declined significantly, coming in at 67% in the quarter and 70% for the trailing 12 months. The home-related loss ratio was 60%, since those are its most-seasoned products. Management pointed out that it's launching auto insurance strategically, since each new region is a new product with a higher loss ratio, and it needs to balance the rollout to keep the loss ratio moving in the right direction.

The opportunity is enticing

If the company continues to demonstrate accelerating or at least high growth while maintaining operating efficiency, net profit should eventually follow. Management sees the opportunity to increase IFP to $10 billion, or 10 times its current level.

About a third of its sales are organic, and as it establishes its brand presence, it won't have to rely on marketing as much as it does today. It expects positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) before the end of 2026, and positive net income in 2027. From there, it forecasts "massive" profits.

Lemonade feels that it has an edge against legacy insurance companies because it was built digitally, with interconnecting parts that require minimal human intervention. Although the traditional insurance companies are also using AI today, they have disparate elements and still work with human insurance agents while Lemonade mostly relies on chatbots. Lemonade also has an edge against newer AI disruptors because it already has a decade of data and experience.

Its strategy is to capture a younger market and grow with those customers, and it's already the most popular insurance brand among ages 22 to 40. This age cohort is just starting out getting jobs and needing insurance, but as the preferred brand, Lemonade has a huge opportunity ahead. Lemonade stock could be an incredible investment for investors with some appetite for risk and a long time horizon.

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Jennifer Saibil has positions in Lemonade. The Motley Fool has positions in and recommends Lemonade. The Motley Fool has a disclosure policy.