Why lemonade stocks fell 15% in December


What happened

Insurance disruptor Lemonade (NYSE: LMND) continued to leave a bitter taste in investors’ mouths last month as the stock’s long decline continued. According to data from S&P Global Market Intelligence, insurtech stocks fell 15% in December.

As you can see from the chart below, the stock was volatile but still ended the month down 15%.

^ SPX data by YCharts

So what

Lemonade was one of many growth stocks that skyrocketed at the start of the pandemic, only to collapse this year amid valuation concerns and lack of profitability.

The insurance company, which uses an AI model to process claims and enroll new customers instantly, holds the promise of disrupting a massive industry, but a large addressable market on its own makes no sense without execution. So far, Lemonade has grown rapidly but has also seen significant losses, raising concerns that it may need to raise capital as early as next year. Additionally, the stock is still trading at a high price / sell ratio of around 20.

A person standing next to a car writes on a clipboard.

Image source: Getty Images.

There was no significant company-specific news on Lemonade in December, but concerns about its valuation and consumption of cash continued to weigh on the stock, and questions arose following its acquisition of the stock. auto insurance company. MetroMile (NASDAQ: MILE). Meanwhile, talks about the Federal Reserve’s tightening monetary policy put pressure on the stock.

The MetroMile deal will help accelerate the company’s journey to auto insurance, as MetroMile has licenses in 49 states. However, as a stock, MetroMile disappointed after going public as a SPAC in early 2021. Investors reacted badly to news of MetroMile, which came out concurrently with its third quarter earnings report, and the stock fell more than 10%. .

Now what

Lemonade stock fell 66% last year as an early rally collapsed, and it has been declining steadily for much of the second half of the year. A combination of market sentiment shifting away from high-priced growth stocks and concerns about tightening monetary policy helped to sway Lemonade stock.

However, there are parts of Lemonade’s strategy that could be misunderstood. Bears often deride the stock for its high loss ratio or the percentage of premiums it pays in claims, which reached 77% in its last quarter. Still, the company has a high loss rate because many of its lines of insurance are still new, such as home and pet insurance, and not because of mismanagement. Over the long term, the company expects the loss ratio across all product lines to be below 75%, which means Lemonade will progress to profitability.

With auto insurance being its next major market, the company still has a long growth path ahead of it – and its valuation looks much more reasonable after last year’s decline.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging 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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