In 2015, Lemonade (LMND 4.36%) was founded with a mission to reshape the insurance industry by using technology to price premiums more accurately, and to deliver a much better customer experience. Artificial intelligence (AI) is at the core of that strategy because it enables the company to automate everything from quotes to claims.

Lemonade stock has soared 111% over the past year on the back of strong growth across its business, but it remains 81% below its record high, set during the tech frenzy of 2021. With the company coming off its best year ever in 2024, a continued recovery for the stock is very likely.

Here's why there's no time like the present for investors to buy into the Lemonade story.

Image source: Getty Images.

Customers are lining up to join Lemonade

Lemonade operates in five insurance markets: renters, homeowners, pet, life, and auto. The company had over 2.4 million customers at the end of 2024, up 20% from the year-ago period. According to a presentation in November, over 700,000 customers are on a wait list for Lemonade car insurance when it becomes available in their region.

Lemonade's AI-driven approach is a big reason for its popularity. The company says 97% of all policies are now sold autonomously by its AI chatbots, and customers can receive a quote in under 90 seconds by using the Maya virtual assistant on its website. The claims process is also handled by AI, which processes 55% of them without human intervention. In many cases, customers receive their payment in under three minutes.

That is a big departure from the customer experience with traditional insurers, which can involve lengthy phone calls and waiting periods when buying policies or making claims. But AI can also benefit customers on pricing -- Lemonade developed a series of lifetime value (LTV) models that predict the likelihood of customers making a claim, switching insurers, and buying multiple policies, in order to come up with its policy premiums.

The LTV models also help Lemonade identify underperforming products and geographic markets, so managers can quickly redirect marketing spending to generate a better return.

Lemonade grew its in-force premium (the value of premiums from all outstanding policies) 26% year over year during 2024 to a record $944 million, marking an acceleration from its 20% increase in 2023. It achieved that result while also reducing its workforce, thanks entirely to the automated processes and efficiencies enabled by AI.

Significant progress at the bottom line

Lemonade's long-term goal is to consistently operate with a gross loss ratio of 75% or less (this figure represents the proportion of premiums paid out as claims). It can be lumpy at times because payouts can exceed premiums when Lemonade enters new geographic markets or launches new products, but it came in at 63% during the fourth quarter of 2024, which was the best result in the company's history. That said, Lemonade's gross loss ratio of 73% for full-year 2024 is a better representation of the metric since it smooths out quarterly fluctuations.

The accelerating growth in in-force premium, combined with the steadily declining gross loss ratio, sent Lemonade's gross profit soaring 98% to a record high of $166.9 million in 2024. The company still reported a $202.2 million net loss on a generally accepted accounting principles (GAAP) basis, which includes non-cash expenses like stock-based compensation.

Lemonade's preferred measure of profitability is adjusted free cash flow, a non-GAAP metric that strips out non-cash items. This figure came in at $47.6 million for 2024, a major swing from the $113.4 million outflow it saw in 2023. It also marked the first year of positive adjusted free cash flow in the company's history.

Why Lemonade stock is a buy now

Lemonade is still scaling its business. It operates in the United States, the United Kingdom, and three European countries, but it plans to expand, which could temporarily halt the stellar progress it has made with its gross loss ratio and profitability. As a result, Lemonade stock should be reserved for long-term investors who are willing to endure the bumpy ride in exchange for future returns.

On that note, Lemonade believes it can grow its in-force premium tenfold to $10 billion over the next nine years. That's roughly the same amount of time it took the company to achieve its first $1 billion of in-force premium, which highlights how rapidly its business is scaling.

Finally, let's talk about valuation. Based on Lemonade's $526.5 million in 2024 revenue and its market capitalization of $2.3 billion, its stock is trading at a price-to-sales (P/S) ratio of 4.5 as of this writing, well below the levels seen just a few years ago.

Data by YCharts.

Given the company's accelerating in-force premium growth, as well as management's long-term forecast, there's plenty of room for the stock to move higher.