Risk/Reward Rating: Negative
Lemonade is an unprofitable insurance company that has decided to market its stock directly to retail investors. This decision could leave a sour taste with investors as insiders control one-third of the company’s shares. Retail investors currently own one-third of the shares as executives are pitching the stock to them in ‘simple terms’ creating a conflict of interest given the information asymmetry between the insiders and retail investors.
If things turn south for Lemonade’s stock price, the backlash from retail investors, who are potential Lemonade insurance customers, could create a negative feedback loop between the company’s share price, its business results, and management credibility. The unprofitable nature of the insurance operations combined with an extreme valuation makes this negative feedback loop a real possibility.
Valuation: 52x expected 2021 revenue and 5.43x book value. The book value is elevated due to the recent IPO and the large amount of cash raised. The company projects an adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) loss of -$168 million for 2021 while profitability is not anticipated for the foreseeable future. This will lead to a declining book value over the coming years in the absence of further capital raises.
A valuation comparison highlights the extreme nature of Lemonade’s share price. Progressive trades at 1.27x revenue, 3x book value, and 17x 2021 earnings estimates. Progressive is but one example of the highly competitive nature of the insurance industry with entrenched blue-chip companies.
Brand equity and scale are competitive advantages in the insurance industry and Lemonade lacks both. Brand equity and scale require time, heavy advertising spend, and consistent business execution.
It should be noted that Lemonade’s stock price could continue to deviate materially from a fundamental fair value estimate given management’s appeal to less sophisticated retail investors as evidenced by GameStop, AMC Entertainment, and many others recently.
Technical resistance: $113 to $120 area.
Technical support: $80 and $60 have served as support in recent months. Given the disconnect between the valuation and the business, the $45 area post IPO low may be tested again as well.
Lemonade 1-year daily chart
Price as of report date 6-20-21: $103.13
Lemonade Investor Relations Website: Lemonade Investor Relations