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© Source: Stephanie L Sanchez / Shutterstock.com Lemonade logo displayed on smartphone laying on top of computer keyboard.

Lemonade (NYSE:LMND) has sloped down since its IPO, but there’s reason to be hopeful about Lemonade stock at these levels.

© Provided by InvestorPlace Lemonade logo displayed on smartphone laying on top of computer keyboard.

Big data is radically transforming how we do business. Data collection and interpretation is becoming easier and more accessible. As a result, companies now have more raw data than ever before, and it is helping businesses make more informed decisions. That’s why Lemonade stock has become such an attractive play in the insurance sector.

Lemonade is a new company that is operating within a very competitive market. But the business model sets it apart from its peers.

Lemonade leverages big data and artificial intelligence to improve the underwriting process, detect fraud, and process claims. Due to this efficient and sustainable model, it looks more attractive than peers Allstate (NYSE:ALL) and Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) — especially if you are forward-looking.

Although Lemonade stock is trading at very high multiples, I would still class shares a bargain, considering they are at a 43% discount to their 52-week high of $96.51. And that in terms of revenue growth, it stands head and shoulders above its peers.

Lemonade Stock Is a Growth Stock With a Solid Story

© Provided by InvestorPlace Chart showing the revenue growth rates in the insurance market and how it correlated to share price spikes in Lemonade stock Source: Chart by Faizan Farooque, data from filings and analyst reports

Peter Sondergaard, Senior Vice President, Gartner, has said, “Information is the oil of the 21st century, and analytics is the combustion engine.” Long story short, data is a big deal, and any company with the power to leverage it stands to make a lot of money.

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Lemonade is operating in a sector dominated by companies that function with a fairly traditional business model. In a typical homeowner’s policy form, you will get, at max, 40 fields to fill information. In contrast, Lemonade collects 100 times more data per customer.

Naturally, that means the company has a lot more information to work with than the traditional insurer. It also implies Lemonade can tailor its services to match the requirements of its customers. All this translates to a more precise loss ratio and recurring revenue, leading to higher gross margins.

How Does the System Work?

All the customer interactions across the platform are recorded and sent to a central repository, the Customer Cortex, after which it’s analyzed. With each new transaction, the platform gains more information, which helps in its predictive models.

The resulting information is then fed to six different applications that use this clean data for underwriting policies, preparing claims, and identifying fraud. For example, a basic AI bot will take care of rudimentary questions that you may have. If you want to purchase insurance or buy a claim, then you’ll be directed to either one of two chatbots, AI Maya or AI Jim.

The former will take care of insurance purchase requests while the latter will help you file your claim. Both these processes are devoid of human interaction.

Cooper is an internal bot that will look into tedious tasks such as running tests on each software release and formatting regulatory filings. On some occasions, it can even handle complex tasks such as stopping activities in high-risk areas. Then there is is a predictive model to improve fraud detection. Finally, Blender runs the company’s back-end system and manages workflows.

Automating these processes is leading to decreasing costs and declining gross loss ratio. And with better data, these stats will only improve with time.

However, the company’s systems will come under fire when customers start to pile up. Lemonade wrote $115.8 million in premiums in 2019, less than 0.1% of the property and casualty insurance market. So, the company still has to undergo a stress test before we know how good it is handling large claim values.

It’s no surprise that with such a lean, mean business model, Lemonade stock is making substantial gains. There is going to be the one-off bump, but margins will always be healthy. And the great thing is that Lemonade is not resting on its laurels. Instead, it’s looking to expand on the product side and geographically.

Currently, Lemonade operates in two European countries and 35 U.S. states. It has announced it’s going to expand into France by the end of the year. It’s authorized to operate in 41 states, so there is plenty of space to grow in the U.S. as well.

Summing Up

Lemonade has managed to disrupt the traditional insurance market successfully. Through using big data and artificial intelligence, the company has managed to provide excellent customer experience while keeping costs low. As a result, the business model is very attractive.

The one thing going against Lemonade stock is that it’s valued at steep premiums compared to more established names like Allstate or Berkshire Hathaway. But the thing to note here is that Lemonade is a growth story, and you would want to buy in when it’s trading at a discount.

The stock has a 12-month price target of $70 per share, with an upper estimate of $105. As the business scales in the coming months, I believe we could be seeing these numbers a lot sooner than anticipated.

Lemonade stock is a firm buy for me.

On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. He has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.

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