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Is Lemonade Stock a Solid Long Term Investment?

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Long-term investing means holding an investment for more than a year's time. It has a number of benefits. For instance, so long as interested individuals have made a good choice of investment, they can just ride out both the highs and the lows in its value.

This is particularly important because most people aren't very good at timing their investments, which is one of the reasons that short-term investing comes with such a high measure of risk. Furthermore, long-term investing comes with fewer costs. After all, holding an investment for more than a year's time means making fewer transactions.

In turn, this means fewer taxes as well as fewer costs, both of which can add up with surprising speed when people make a lot of transactions while engaged in short-term investing. Combined, it is no wonder that long-term investing is so popular with such a wide range of people out there.

What Do You Want Out of Your Long-Term Investment?

Having said that, if someone wants to make a long-term investment, they need to have a clear idea of why they are making it. After all, if an investor doesn't have an investment goal in mind, they are going to find it difficult to choose the right investment based on the characteristics that are most relevant to that investment goal.

This is particularly true because different people can have very different reasons for investing. For example, one person might be interested in seeing their long-term investment increase in value as much as possible.

In contrast, another person might be interested in collecting dividend payments even if that means that their long-term investment won't see much of an increase in value. Whatever the case, having a clear investment goal in mind is how interested individuals will be able to choose the right long-term investment for themselves.

What Is Lemonade?

Chances are good that interested individuals can guess that Lemonade isn't a lemonade manufacturer. Instead, it is an insurance company. However, Lemonade isn't just any insurance company, as shown by how it has been getting a fair amount of attention even though it is a relative newcomer that has been in the insurance industry for less than a decade's time.

For those who are curious, Lemonade is an excellent example of outsiders with tech-based backgrounds doing their best to change the way that a long-standing industry works.

Its founders have stated that they want to change the perception of insurance from a "necessary evil" to a "social good," which they believe to be very important because insurance plays such an important role in modern society. To this end, they have implemented a number of notable things.

AI Versus Behavioral Economics

One would be a business model powered by AI versed in behavioral economics. Another would be the donation of leftover premiums to the charity of the customer's choice. The last point can sound rather strange to interested individuals. However, it is nonetheless fundamental to what Lemonade wants to do.

In short, Lemonade is indeed a for-profit business. It isn't involved in insurance just because it wants to do something good for society. Instead, it wants to make a profit while doing something good for society. However, it is different from other insurance companies in that it takes a fixed fee from the insurance policies that it sells.

After that, the premiums paid for those insurance policies that remain once the costs have been covered go to charities rather than Lemonade itself.

It isn't hard to see why that setup might be popular with consumers. However, it is also supposed to be important for the way that Lemonade operates. Generally speaking, the incentives of insurance companies are not aligned with the desire to provide their customers with good insurance coverage.

After all, if they can deny coverage, they can increase their profits by collecting premiums without having to pay anything out. Something that has been known to lead to some very perverse results. If interested individuals are curious, their search engine of choice can provide them with plenty of stories about people feeling cheated by their insurance companies in one way or another.

Negative Perception of Insurance Companies

As the founders of Lemonade have pointed out, this has resulted in a very negative perception of insurance companies, which is a real issue when insurance products really are very important products to have in modern times.

By eliminating the potential for Lemonade to benefit from denying coverage to its customers, they are hoping to make it a better kind of insurance company.

This isn't just beneficial for that single reason; this also has consequences for the company's behavior throughout its operations. In particular, Lemonade claims to be much more open and transparent about what is going on than its competitors because it doesn't have any reason to be hesitant about giving that information to its customers.

Supposedly, its customers have been responding by being more open and transparent themselves, not least because any bad actions that they might choose to take won't be hurting an insurance company with which they have either a semi-hostile or outright hostile relationship but rather a charity promoting a cause or causes that they support.

Other than this, Lemonade is an insurance company making money in much the same manner as other insurance companies. Simply put, it sells insurance policies. Furthermore, Lemonade has been expanding its operations through a couple of ways. One, it has been expanding its operations to cover more locations.

Two, it has been expanding its operations to cover more kinds of insurance policies. As such, if Lemonade can live up to its promise, it could be a very notable name in the times to come.

The CEO Expects Losses to Peak in 2022

For starters, Lemonade is still one of those companies that are working towards profitability. Such companies aren't exactly rare. After all, it takes time for companies to get themselves off of the ground, which in turn, means that it takes money for them to do so. Interested individuals should definitely ask themselves questions based on this.

For example, a company that is working towards profitability isn't necessarily a bad investment in the long run. However, it is important to ask whether it has a clear path towards profitability because its situation becomes much more precarious if it does not. Similarly, if a company is still working towards profitability, people should give some thought to how that company plans to sustain itself while it is still losing money.

Fundraising is a very popular option, but fundraising has some serious consequences for their ownership stake as represented by their stocks. In any case, Lemonade's CEO has stated that he is expecting the insurance company's losses to peak in about six or nine months, which would be within 2022.

This doesn't mean that the insurance company will start becoming profitable after 2022. However, it does mean that the insurance company is expected to start making progress towards becoming profitable after 2022. As such, if Lemonade's CEO is to be believed, Lemonade has a path to becoming profitable. The issue is how long it will take before it reaches that point, particularly since the rate at which it uses its cash reserves has been a matter of serious concern for its investors.

Its Losses Have Been Quite Bad

Speaking of which, that concern becomes much more understandable when one sees the kind of losses that Lemonade has been taking. For context, the insurance company had a net loss of $241 million in 2021, which is about double its net loss of $122 million in 2020.

There is some positive news in that the insurance company's net loss as a percentage of its revenues has been lowering over time, meaning that the insurance company is moving in the right direction from the perspective of profitability. Even so, those losses are very bad.

Meanwhile, Lemonade's cash situation isn't exactly wonderful either. Some people have been known to assume that income and cash flow go hand-in-hand. However, that isn't true for anyone other than those who use cash-basis accounting, which tends to be a thing for small businesses.

It is very much possible for income and cash flow to either move in tandem or move in very different directions from one another. Unfortunately, Lemonade's cash situation makes it clear that it is going to have to raise more cash at some point in the not too distant future because its $271 million in cash and cash equivalents aren't going to last very long when it had an operating cash outflow of $145 million in 2021.

That is going to have consequences for its shareholders, meaning that interested individuals will want to factor that into their considerations.

It Has Been Seeing Considerable Growth

Lemonade hasn't been taking those losses for nothing. Instead, it has been aggressively marketing itself. This can be seen in how its customer base rose to 1.4 million in 2021, which is an increase of 43 percent when compared with 2020.

In dollar terms, its in-force premiums have increased to $380 million, which is an increase of 78 percent when compared with 2020. Of course, considering the way that Lemonade makes it money, it is important to note that this translated into a 36 percent growth in its revenues.

Having said that, Lemonade has plenty of rooms to expand into. Insurance is important, which is why insurance has such huge markets. Moreover, Lemonade isn't even close to having tapped all of the markets that it can tap into. Currently, it has operations in not just the United States but also both France and the Netherlands.

Even so, it is clear that it is still at a very early point in its efforts to break into U.S. insurance markets. For proof, look no further than the fact that its car insurance is available in just a single U.S. state. Lemonade has a lot of future opportunities for growth because it can continue spreading its various products into each of the markets before it.

It will presumably take serious losses as it pays for the marketing as well as the other costs needed to get its presence going in those places. Still, it should be able to tone those down to some extent as it continues to learn from its current efforts. Moreover, Lemonade's leadership seems confident that the insurance company's current operations will continue moving towards profitability, which will presumably make up for that to some extent.

Its Share Price Has Fallen a Lot

It is interesting to note that Lemonade's share price has fallen a lot from its former height. There are those who would see this as something to be concerned about because that makes it very clear that there is a fair amount of volatility packed into this stock.

However, there are also those who would see this as a positive because buying low and selling high is one of the fundamental rules for successful investing. Of course, that would only work if Lemonade can indeed prove to be profitable in the long run, so that isn't exactly a risk-free bet by any standard.

Should You Invest in Lemonade For the Long Run?

Everyone will need to make up their own minds about whether they should invest in this kind of stock or not. Different people can have very different investing priorities, which is why they should always consider what they want.

This doesn't mean that interested individuals shouldn't listen to professional advice, just that they should always keep their investment goals first and foremost while taking that information in.

Lemonade is not a mature stock for someone who wants to be comfortable. Instead, it is a potential up-and-comer for someone who is prepared to bet on its rise in value, which means accepting the possibility that they will lose out because of that bet. Risk and reward go hand-in-hand in investing. Lemonade shows that better than a lot of other stocks out there.

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Allen Lee

Written by Allen Lee

Allen Lee is a Toronto-based freelance writer who studied business in school but has since turned to other pursuits. He spends more time than is perhaps wise with his eyes fixed on a screen either reading history books, keeping up with international news, or playing the latest releases on the Steam platform, which serve as the subject matter for much of his writing output. Currently, Lee is practicing the smidgen of Chinese that he picked up while visiting the Chinese mainland in hopes of someday being able to read certain historical texts in their original language.

Read more posts by Allen Lee

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