Is lemonade a reason to buy lemonade stocks?

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Lemonade (NYSE: LMND) is on to something. A young generation of consumers born and raised with electronic devices are looking for products and services to suit the digital age we live in, helping this insurance company to capture 1 million customers in record time (a little more than four years). Building on its first successes, Lemonade has just announced that it will launch an auto insurance product by the end of 2021.

But is Lemonade Car a reason to buy lemonade stocks? It might be, but only if you buy with the right expectations.

An important but expected product launch

It was a given Lemonade was planning a big product launch. The company has made it clear its intentions to disrupt the insurance industry. He has made rapid progress with tenant and landlord policies, pet insurance, and the most recent addition of term life. But these are relatively small lines of insurance compared to the industry as a whole. Armed with more than half a billion dollars in cash at the end of 2020 and having raised an additional half a billion through a second equity offering in January, a more complex product like auto insurance or health was certainly on the way. .

Image source: Getty Images.

Enter Lemonade Car, which is now available for early registration for existing and new customers. Automatic coverage is a big step. Basic liability insurance is mandatory for drivers in the US and Europe (with a few exceptions, but it’s a good idea to have it anyway!). Lemonade said it was launching the new product in response to “overwhelming demand” from customers. At the very least, it looks like Lemonade has a significant opportunity to bundle Car with its existing lines.

But for me, the pace of new customer additions is the number one metric I watch for this fintech company. A million customers in just a few years is impressive, but the company will need several million more to justify its valuation (its enterprise value is currently around $ 4.7 billion). Lemonade Car could certainly help the company keep the pedal to the metal. Lemonade says the auto insurance industry is worth $ 300 billion a year in the United States alone, 70 times more than renters and pet insurance. Lemonade added that its existing customers here in the United States spend around $ 1 billion a year to cover their cars, indicating the type of benefits the company has here. Its customer base represents one-third of one percent of the total auto insurance market. If Lemonade Car is a success, there are plenty of new policyholders who could come into the fold.

Be prepared to show great patience

Investors seem to agree that Lemonade Car is a big deal. The stock rebounded more than 10% after the announcement of the new line of insurance – although the company’s share price remains half of what it was at its peak in January.

These wild fluctuations in stock prices illustrate an important point, however. Lemonade is a fast growing company, but the expectations of adding many new customers in the foreseeable future are already built into the inventory. The lemonade car ad alone isn’t a reason to pile up with a big lemonade stock purchase. This is an important step, of course, but be patient and slow down when buying lemonade for the first time (or adding to an existing item). There will be more bumps in the road, even with a massive new launch like auto insurance. Automotive (and possibly health insurance) are more complex products and will be a big test for Lemonade’s AI-driven business model and behavioral economics. Allow yourself the flexibility to buy more stocks later when the inevitable declines occur.

Nevertheless, Lemonade Car promises progress for this young upstart of the insurance. I hope the company can add many new customers as well. Stay tuned for updates to this statistic during quarterly earnings announcements.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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