After a soaring 2020, many experts were predicting a market crash coming into 2021. That hasn't happened yet, and the S&P 500 reached new highs in May. The Labor Department released the Consumer Price Index for April, which increased more than expected, leading to inflation fears.
Despite the broader market rise, the tech sector has seen a sell-off, likely due to prices that have skyrocketed without regard for valuation. Lemonade (NYSE:LMND) stock has been sinking, and it tanked after its first-quarter earnings report. Even after a recent recovery, it's down 36% year to date. But I'm not selling now, or even if the market crashes. Here's why.
Image source: Getty Images.
It's not as bad as you think
Lemonade is an insurtech, or insurance technology, company that offers renters, homeowners, pet, and life insurance. It's also getting ready to launch auto insurance.
Lemonade uses artificial intelligence to offer quick and accurate policy quotes and approve claims quickly, in as little as one second. The digital and customer-oriented approach is catching on fast, and the company racked up more than 1 million customers in four years of operation.
Sales decreased 10% in the first quarter, which was partially affected by the company's agreements with its reinsurers in the 2020 third quarter. In the revised agreements, Lemonade pays them more money, which affects total revenue, but gives it less exposure to risk. Some of the better numbers were a 25% year-over-year increase in premium per customer and an 89% increase in in force premium (IFP), which measures the aggregate annualized premium.
Investors weren't happy with the overall results, which also featured a 121% loss ratio, well above the company's typical ratio of around 70%. This was due to the brutal deep freeze in Texas this February, and Lemonade received a year's worth of claims in just a few days. The company provided guidance for the second quarter of IFP to increase between 83% and 86%, and adjusted loss to widen as it increases headcount to meet customer demand and invests in the Lemonade Car venture.
Some of those results don't look so good. But here's why I'm holding on.
A business with far-reaching prospects
Lemonade is still in its infancy and has a lot of plans on the horizon. It recently announced the launch of Lemonade Car, which could be a huge addition to its business. CEO Daniel Schreiber said that the U.S. auto insurance market is $300 billion, or 70 times the renters insurance market and 80 times the pet insurance market. That could significantly affect Lemonade's sales.
It also fits into the company's growth strategy, which includes acquiring customers when they're young and retaining them as they go through lifecycle events. Lemonade's target users are in their early 30s, buying homes for the first time, purchasing life insurance, and buying cars. This is already playing out, as half of the new business in Q1 came from non-renters products. And it expects homeowners policies to increase as auto gets rolled out.
This is also demonstrated in its premium per customer, which increased 25%. So for the initial customer acquisition cost for a low-priced policy, for example $150 for renters insurance, it will receive a homeowner's policy of, say, $900, later on. Between renters, homeowners, pet, life, and soon car, Lemonade is trying to scale its business and improve the overall economics.
Don't fear stock movement
Many of the stocks that have minted millionaires lost a lot of their value many times over the years, such as Netflix and Apple. Investors who bought in early and held on reaped the benefits. Market crashes reflect a societal climate, not the underlying health of a business. A well-managed company with big opportunities should bounce back.
I can't tell you if Lemonade will make you a millionaire, but I can tell you that it has a solid business with long-term potential, and patient shareholders are likely to be rewarded.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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