Is Lemonade Car Reason to Buy Lemonade Stock?

Lemonade (NYSE:LMND) is on to something. A young generation of consumers born and raised with electronic devices is looking for products and services to match the digital age in which we live, helping this insurance upstart pick up 1 million customers in record time (just over four years). Building on its early success, Lemonade just announced it will launch a car insurance product by the end of 2021.  

But is Lemonade Car reason to buy Lemonade stock? It might be — but only if you buy with the proper expectations.

A big but expected product launch

It was a foregone conclusion Lemonade was planning a big product launch. The company has been clear about its intentions to disrupt the insurance industry. It’s made fast progress with renters and homeowners policies, pet insurance, and the most recent addition of term life. But those are relatively small insurance lines compared to the industry overall. Armed with more than half a billion dollars in cash at the end of 2020 and having raised another half a billion more via a second stock offering in January, a more complex product like car or healthcare insurance was certainly on the way.

A man in a car taking the keys from someone off screen.

Image source: Getty Images.

Enter Lemonade Car, which is available now for early registration for existing and new customers alike. Auto coverage is a big move. Basic liability insurance is a requirement for drivers in the U.S. and Europe (with a couple of exceptions, but it’s a good idea to have it anyway!). Lemonade said it’s launching the new product in response to “overwhelming demand” from customers. At the very least, it sounds like Lemonade has significant opportunity to bundle Car with its existing lines.

But for me, the pace of new customer additions is the primary metric I’m watching for this fintech company. One million customers in just a few years is impressive, but the company will need many millions more to justify its valuation (its enterprise value is currently about $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 U.S. alone, 70 times larger than both renters and pet insurance. Lemonade added that its existing customers here in the States spend about $1 billion a year covering their cars, indicating the kind of upside the company has here. Its customer base represents one-third of a percent of the total auto insurance market. If Lemonade Car is a hit, there are plenty of new insured that could enter the fold.  

Be ready to exercise serious patience

Investors seem to agree Lemonade Car is a big deal. The stock rallied more than 10% after the new insurance line was announced — though the company’s share price remains half what it was at its high-water mark in January.  

These wild share-price fluctuations illustrate an important point, though. Lemonade is a fast-growing company, but expectations for adding lots of new customers for the foreseeable future is already priced into the stock. All on its own, the Lemonade Car announcement is no reason to pile in with a big purchase of Lemonade stock. It’s an important milestone, to be sure, but exercise some patience and take it slow when buying Lemonade for the first time (or adding to an existing position). There will be more bumps in the road, even with a massive new launch like auto insurance. Auto (and perhaps eventually healthcare insurance) are more complex products and will be a big test for Lemonade’s AI- and behavioral-economics-based business model. Leave yourself room to buy more shares later on when the inevitable dips come.

Nevertheless, Lemonade Car is promising progress for this young insurance upstart. I expect the company will be able to add many new customers as a result. Stay tuned for updates to that metric during quarterly earnings announcements.

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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