Could Buying Lemonade Stock Today Set You Up for Life?

Key Points

• Lemonade’s stock has been on a wild ride since its public debut.

• Its growth accelerated in 2024, and it should maintain that momentum this year.

• Its stock still looks reasonably valued relative to its long-term growth potential.

• 10 stocks we like better than Lemonade ›

Lemonade (NYSE: LMND) has been a wildly volatile stock since its initial public offering five years ago. The online insurance services provider went public at $29 in July 2020, then skyrocketed to a record closing price of $183.26 in early 2021 during the peak of the meme stock mania.

The company initially impressed investors with the rapid growth of its artificlal intelligence (AI)-powered platform, which simplified the insurance buying and claims filing processes with algorithms and chatbots. That digital-first approach made it a popular choice for younger and first-time insurance buyers. It originally offered only homeowners and renters' insurance, but subsequently rolled out term life, pet health, and auto insurance policies. It acquired Metromile in 2022 to expand its auto insurance business.

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Image source: Getty Images.

But today, Lemonade's stock trades at about $42. It stumbled as its growth cooled off, and it racked up losses, popping its bubbly valuation. Then inflation and rising interest rates further sapped the share price. But during the past year, it has been climbing back. Could the shares today represent a golden buying opportunity?

What happened to Lemonade over the past few years?

Lemonade attracted a lot of attention with its AI chatbots, but it still gauges its growth like a traditional insurance company -- by measuring its total number of customers, its in-force premiums, its gross earned premiums, and its gross loss ratio.

Data source: Lemonade.

All of those growth metrics decelerated in 2023 as its adjusted gross margins narrowed. That slowdown was caused by lagging rate approvals by regulators for its home and auto policies in several states (which prevented it from compensating for inflation with quick rate hikes), and its decision to approve fewer policies and curb its ad spending in those states until its new rates were approved. But in 2024, Lemonade's growth generally accelerated again as it secured rate approvals, its algorithmic pricing model was approved in more states, and it ramped up its marketing spending again to acquire new customers. The automation of its onboarding and claims processes also reduced its costs as it expanded, which boosted its gross margins, and it has been ceding a larger portion of its risks to big reinsurers to insulate itself from bigger losses.

What's next for Lemonade?

For 2025, Lemonade expects its in-force premiums to rise by 27% to 28% as its gross earned premiums grow by 24% to 25%. It expects its revenue to increase 26% as its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) improve from 2024's loss of $150 million to a loss of between $135 million and $140 million.

From 2024 to 2027, analysts expect Lemonade's revenue to grow at a compound annual rate of 33%. They also expect its adjusted EBITDA to turn positive by 2027. That growth could be driven by its bundling strategies, upgrades to its AI pricing models, and its expansion into Europe.

Lemonade had 2.5 million customers in its latest quarter, but it's still a minor player compared to insurance giants like Allstate (NYSE: ALL), which serves more than 16 million customers, or State Farm, which handles more than 94 million policies. Those who are bullish on Lemonade's prospects expect it to keep pulling customers away from those market leaders with its streamlined AI platform, but skeptics will point out that those bigger companies have also been beefing up their AI capabilities.

If you expect Lemonade to maintain its early mover advantage in the AI-powered insurance race and gain millions of new customers, it could generate big gains during the next few decades. With an enterprise value of $3.3 billion, it still looks reasonably valued at a little more than 5 times this year's sales. So while I wouldn't confidently proclaim it's a stock that can "set you up for life," I think it might be a good long-term play on the AI-driven evolution of the insurance industry.

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Leo Sun 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.