Buy-side stock analysts can be helpful. They often have advanced financial skills and training, backed by years or even decades of experience in asset management. So it can be helpful to see what Wall Street professionals are saying about your next investment idea.
That said, they don’t always have the right answers or the best analysis. In most cases, analysts’ consensus stock ratings are backward-looking assessments of recent events — not insightful predictions of what might happen in the future.
The street was only moderately enthusiastic about Nvidia before the release of ChatGPT made it a market darling. Back then Netflix (NASDAQ: NFLX) was a no-brainer buy in the wake of the 2011 Qwikster crisis, with the consensus analyst opinion on the stock being a hold, with a slight bearish bias. That turned out to be a fantastic time to buy Netflix stock, with returns of over 5,300% over the next 12 years.
So analysts aren’t always right, even when their average recommendation is unusually bearish. In that respect, Wall Street’s attitude toward computer-driven insurance companies is Lemonade (NYSE: LMND) reminds me of the old Netflix miscalculations at the moment. The consensus recommendation is a hold, with slightly more sell than buy outliers.
I think this recommendation will go down in history as one of the classic blunders. Here’s why Lemonade stock looks poised to rebound from this low.
The Market Consensus on Lemonade
The current analyst rating for Lemonade is a slightly bearish hold. Of the 10 analyst firms that have rated the stock, six are sticking to a middle-of-the-road hold recommendation. One stands out with a buy rating, while three are suggesting some sort of sell action.
Judging from their questions on Lemonade’s latest earnings call, bearish analysts are concerned about the company’s exposure to catastrophic injury claims, or CAT. A spate of devastating winter storms led to an unfavorable gross loss ratio, weighing on Lemonade’s profitability.
It’s harder to determine the motivation for the lone bullish rating from Karol Chmiel of Citizens JMP Group. The analyst rarely asks questions on the company’s earnings calls, and JMP is reluctant to make its research reports public.
The Positive Scenario for Lemonade
So here’s my own Lemonade analysis. I’ve been a longtime shareholder in this innovative insurance company, which started relying on artificial intelligence (AI) to run its core business long before it was cool.
Lemonade’s automated approach makes immediate sense to me from a consumer perspective. Traditional insurance experts, such as Progressive or Allstaterely on human agents to recruit, enroll, evaluate, and manage customers. The process is prone to human error at every stage, and it makes perfect sense to take the emotion out of this business with computer-driven automation.
The deep learning systems that handle Lemonade’s insurance policies and claims aren’t perfect either. In fact, these systems have made many imperfect decisions to date, resulting in painfully high loss ratios and negative bottom-line results.
But here’s the thing — Lemonade’s insurance systems make suboptimal decisions for the company early on, as they build a larger knowledge base and deeper understanding of the insurance industry. Every insurance industry becomes more financially stable as it scales, and that’s only truer for Lemonade, with its direct reliance on real data from real customers and real insurance claims.
So it’s a learning curve, and Lemonade is far from building the perfect robot insurance solution. At the same time, the company is indeed scaling rapidly and setting itself up for long-term success.
How Lemonade Compares to the Industry Giants
I mean, look at Lemonade’s revenue compared to the insurance giants I mentioned earlier. This business is basically a rounding error next to the huge revenue streams of Progressive and Allstate:
But the picture changes dramatically when I switch to percentage-based revenue growth. This time it’s the giants of the industry that look flat-footed:
Lemonade is indeed growing in many ways. In its recent Q2 report, customer numbers increased 14% year-over-year. The average insurance premium per customer increased 8%, resulting in a 22% increase in total in-force premiums.
And the policy management machines are learning a lot from this growing customer base. Lemonade’s gross profit doubled in the second quarter, its net loss ratio is improving over time, and the company reported $4 million in positive net cash flow in this report.
Why I think Lemonade is a fantastic buy today
My take on Lemonade is pretty simple: I see an innovative AI expert aiming to shake up the vast and often inefficient insurance industry. The company is young and has a lot to learn, but its recent production of cash-based profits tells me that Lemonade is getting a handle on things.
So I’m convinced Lemonade is a future insurance giant in the making, and bearish analysts are making another Netflix-esque mistake. Lemonade’s stock is a no-brainer buy right now, and I can’t wait to see how the company sweetens its AI-driven insurance recipes in the years to come. One day, AI-managed insurance could become the industry standard, and Lemonade would stand out as a seasoned leader at that point.
Should You Invest $1,000 in Lemonade Now?
Before you buy Lemonade stock, here’s what to consider:
The Motley Fool Stock Advisor team of analysts has just identified what they think is the 10 best stocks for investors to buy now… and Lemonade wasn’t one of them. The 10 stocks that made the cut could deliver monster returns in the years to come.
Think about when Nvidia made this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $641,864!*
Stock Advisor offers investors an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks each month. The Stock Advisor has service more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns as of August 6, 2024
Anders Bylund has positions in Lemonade, Netflix, and Nvidia. The Motley Fool has positions in and recommends Lemonade, Netflix, and Nvidia. The Motley Fool recommends Progressive. The Motley Fool has a disclosure policy.
Wall Street analysts are pessimistic about this artificial intelligence (AI) stock. Here’s why I’m not. was originally published by The Motley Fool
