Shares of Lemonade LMND have rallied 108% in a year, zooming past the industry’s increase of 10.8%, the Finance sector’s rise of 20.9% and the Zacks S&P 500 composite’s gain of 26% in the same time frame. 

As of Dec. 31, 2023, Lemonade was licensed to sell renters, homeowners, pet and/or car insurance policies in 50 states and Washington, D.C. It operates in 38 of those states and Washington, D.C., which collectively represent approximately 92% of the U.S. population. LMND holds a pan-European license, enabling it to passport into and sell in 30 countries across Europe.

This company has a market capitalization of $2.7 billion. The average volume of shares traded in the last three months was 2.6 million.

LMND Outperforms Industry, Sector & S&P in a Year

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LMND Trading Above 50-Day Moving Average

LMND shares are trading well above the 50-day moving average, indicating a bullish trend. 

LMND Price Movement vs. 50-Day Moving Average

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Optimistic Growth Projection for LMND

The Zacks Consensus Estimate for 2025 earnings implies a 13.2% year-over-year increase on 28% higher revenues of $669 million. The company has a Growth Score of A. 

LMND’s Growth Strategy

LMND remains focused on accelerating growth and improving efficiencies by acquiring profitable new businesses and increasingly focusing on the car insurance business. It believes the car insurance business will become a major growth engine for the company. 

This insurer now wants to grow business by ten fold in near future. Lemonade is focusing more on technology and AI as it gives structural advantage as well as competitive advantage. It believes that its Proprietary Telemacs can lower premiums by 15% for two-third of customers and by 25% for 25% of customers.

It has been successful in generating cash flow and targets to generate positive EBITDA by 2026 and then net profit by 2027 by accelerating the top line and controlling expenses.  Lemonade tripled its gross profit in two years by improving operating expenses and generating a loss ratio of 73.

Being an insurer, LMND is exposed to catastrophe losses. It has pursued various strategic initiatives for CAT exposure, including geographic diversification, product diversification, introducing partners with whom it places a premium in certain regions, and targeted non-renewals in CAT-exposed areas. It noted that diversification has helped it deliver sustained sequential improvement in the gross loss ratio. 

LMND’s Unfavorable Return on Capital

Return on equity in the trailing 12 months was -32.9% versus the industry average of 15.3%. Return on equity, a profitability measure, reflects how effectively a company is utilizing its shareholders.
 

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The return on invested capital (ROIC) reflects a company’s efficiency in utilizing funds to generate income. LMND’s trailing 12 months ROIC was -22.5%, lower than the industry average of 2.4%.

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LMND Shares Are Expensive

The stock is overvalued compared to its industry. It is currently trading at a forward 12 months price-to-sales multiple of 4.03, higher than the industry average of 1.52.
 

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Shares of other insurers that provide car insurance like The Allstate Corporations ALL, The Progressive Corporation PGR and The Travelers Companies Inc. TRV are also trading at a multiple higher than the industry average.

Average Target Price for LMND Suggests a Downside

Based on short-term price targets offered by seven analysts, the Zacks average price target is at $31.29 per share. The average suggests a potential 14% downside from Friday’s closing price.

Image Source: Zacks Investment Research

Final Take on LMND Stock

Lemonade's focus on accelerating growth, scaling operations, deploying artificial intelligence and geographical expansion bodes well for growth.  

Given its expensive valuation, negative as well as unfavorable return on capital, and an average target price that suggests a potential downside, it is preferable to stay on the sidelines for this Zacks Rank #3 (Hold) stock for some more time.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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The Travelers Companies, Inc. (TRV) : Free Stock Analysis Report

The Allstate Corporation (ALL) : Free Stock Analysis Report

The Progressive Corporation (PGR) : Free Stock Analysis Report

Lemonade, Inc. (LMND) : Free Stock Analysis Report

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