The biggest FinTech IPO of 2020 lost around 20% of its share price on Monday (Dec. 28). Lemonade Inc. (NASDAQ: LMND) fell in preparation for the post-IPO lockup period, which is set to end... today.
Brace yourself. It's going to fall further.
If you were thinking of buying some Lemonade shares, this is not necessarily a bad thing. In fact, it can work out for you pretty well down the road - you just have to play it right.
When we wrote about the Lemonade IPO back in July, it was also one of the biggest IPOs of the year. Less than a week after trading, it was up over 176%. Of course, Lemonade was trounced by the Snowflake IPO in November as the biggest software IPO of all time.
Lemonade stock ultimately soared 300% after its July IPO price of $16. But inside buyers are allowed to sell their shares starting today, and that means it could see some serious fluctuation ahead. The amount of potential shares on the move amounts to around 44 million.
Still, the insurance industry is ripe for disruption thanks to Lemonade's marriage of tech and finance. Total insurance industry net premiums were $1.32 trillion in 2019. This is something everybody wants, and it's something everybody wants to be made easier. Lemonade provides that.
That makes Lemonade a strong buy over the long term, but you can expect the short term to be choppy.
Here is what you can expect from Lemonade stock and the mobile FinTech industry as a whole.
What Makes Lemonade Stock Worth It?
Financial technology is undergoing massive changes in the digital economy. As people become increasingly involved with their mobile phones, accessing everything from food delivery to banking on their tiny screens, there will be greater pushes for convenient user experiences on their devices.
Major insurance firms like Geico and State Farm have apps to streamline the customer experience. But these are also huge, clunky legacy firms with heavy expenses (e.g. rent and labor) that ought to be trimmed away over the next decade to compete with more nimble FinTechs.
Lemonade Inc. is one of those FinTechs, an insurance company running on AI and chatbots. On top of that, the company is attempting to change the culture of insurance - turning the "necessary evil" of insurance into a positive.
It's a "public benefit corporation." That means the company attaches a social cause to its success. The specific "public benefit" for Lemonade is allowing customers to donate leftover cash after claims to charity.
Right now, Lemonade is focused on renters and homeowners insurance, but it could widen its horizons to automotive insurance as it grows.
The company's financials have done well in the last few years. Revenue is up 266% since 2018, from $22 million to $97 million.
It's still relatively new to the game, so the company is not yet profitable. In fact, net income decreased from 2018 to now, from -$52 million to -$121 million. But remember, this is natural for a startup like Lemonade, as it needs to spend money to grow early on. The company has only been around about five years thus far - it was founded in 2015.
With the lockup period ending today, shares that were owned before the IPO will hit the market. With the number of outstanding shares increasing, Lemonade stock is down about 20%.
It could go down even further in the next few months. But here's why Lemonade is still a stock to watch...
When to Buy Lemonade Stock
Lemonade competes with companies like GoHealth Inc. (NASDAQ: GOCO) and Root Inc. (NASDAQ: ROOT) for the mobile insurance pie.
While these are larger companies with several years on Lemonade - ROOT has $402 million in trailing twelve-month revenue, and GOCO has $226 million - the insurance industry is still large enough for Lemonade to get a piece.
Comparing Lemonade to these competitors, however, reveals some significant downside risk. If you go look at GoHealth and Root's market capitalization, they are both just over $4 billion. Lemonade is valued higher, at more than $5 billion.
WARNING: It's one of the most traded stocks on the market every day - make sure it's nowhere near your portfolio. WATCH NOW.
Yes, Lemonade has the highest market cap of the three, despite having the lowest annual revenue. This could indicate that Lemonade is steeply overvalued.
Of course, the market could also be pricing in the future growth of Lemonade. It serves a different niche than GoHealth (health insurance) and Root (auto insurance). So it's hard to make a one-for-one comparison of their growth prospects based on past revenue.
But it's not unlikely for a newly public stock to be heavily inflated on investor hype. And even if Lemonade were to lose more than half its price, that doesn't necessarily mean it's out of the game.
The mobile FinTech market is still in early infancy. As Lemonade adds more customers and expands its portfolio, you can more accurately tell whether its revenue can be sustained over time.
Right now, Lemonade's expenses are too high, and revenue too low, to justify the current valuation. But the stock could bounce back after a steep drop in the near term.
Meanwhile, it's likely to meet GOCO and ROOT in the middle as they rise.
This is not an uncommon story with IPOs, as their prices are often inflated on hype. Lyft Inc. (NASDAQ: LYFT) lost nearly 80% of its share price between its IPO and early 2020. But that stock has more than doubled since then.
We could see similar volatility from Lemonade. It's a similarly novel, competitive industry that hasn't quite figured itself out yet. So, just as Lyft lost most of its share price and then bounced back on par with its competition, Lemonade has potential for the same.
However, you want to make sure you buy Lemonade stock for what it's worth. Set a threshold for $50 or lower on this stock, and that should give you a chance at long-term growth.
That sounds awfully steep unless you remember the great market cap disparity with its competition. As it expands to compete with ROOT in auto insurance, it will also have the legacy firms like Geico, Progressive Corp. (NYSE: PGR) and State Farm to deal with.
If you're currently holding the stock, set a stop-loss order at $90 as soon as you can. You can always buy Lemonade later if you are interested.
Meanwhile, you don't want to simply let your money disappear. Your best bet is to take some cash and wait for it to price accurately. Then you can go in and buy at a price much cheaper than what IPO investors paid.
Some IPOs are really great and worth buying at the beginning. This is one of those cases where you can be glad you didn't get in on the ground floor. Stay tuned with us for more IPO news for 2021 and beyond.
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About the Author
Mike Stenger, Associate Editor for Money Morning at Money Map Press, graduated from the Perdue School of Business at Salisbury University. He has combined his degree in Economics with an interest in emerging technologies by finding where tech and finance overlap. Today, he studies the cybersecurity sector, AI, streaming, and the Cloud.