1 Up-and-Coming Artificial Intelligence (AI) Stock That Could Make You a Millionaire – Yahoo Finance

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The insurance industry is complex. Premiums are calculated based on mountains of historical data, which help insurers predict the likelihood of an incident — whether it’s a car accident or a weather event — and therefore, how much a customer should pay.

Artificial intelligence (AI) can be a powerful assistant for insurers because it can process substantial volumes of data quickly and use it to make educated predictions. It’s central to insurance provider Lemonade‘s (NYSE: LMND) business model, but the tech company has also used AI to overhaul the claims process and its customer service.

Lemonade stock traded about 90% below its all-time high that was set during the tech frenzy in 2021. However, its business is growing rapidly. Here’s why the dip could be a millionaire-making opportunity for investors.

Transforming the insurance industry

Lemonade offers five insurance products: Homeowners, renters, life, pets, and auto. The U.S. is Lemonade’s primary market, but some of its products have also rolled out in the United Kingdom, France, Germany, and The Netherlands, and the rest of Europe is in its sights.

The company has acquired more than 2 million customers since it was founded in 2015 and, according to reports, is attracting historically underinsured demographics, including people aged 19 to 34. Lemonade’s Giveback program is one reason for that. It takes a portion of unclaimed premiums each year and pays them forward to charities nominated by each customer. Social causes tend to resonate more with younger generations, so it’s not surprising they’re selecting Lemonade for their insurance.

AI is another reason. Lemonade is transforming the customer experience using technology, which also resonates with younger people. It developed an AI chatbot called Maya that’s capable of writing quotes for prospective customers in under 90 seconds, and another AI bot called Jim, which can pay claims in less than three minutes without human assistance. For some customers, it’s a welcome departure from traditional claims processes, which can involve numerous phone calls and lengthy waiting periods for payouts.

Behind the scenes, Lemonade also uses AI to price premiums. It launched its Lifetime Value 6 (LTV6) model in 2022, which calculated how much a customer should pay based on their likelihood of making a claim, switching insurers, and purchasing multiple policies. It also helped Lemonade identify underperforming products and underperforming geographic markets, so it can pivot its marketing spending to drive more revenue.

Lemonade launched LTV9 more recently. Its AI capabilities grow more advanced with each model, which ultimately leads to more accurate pricing for customers.

Image source: Getty Images.

Lemonade is growing rapidly

The company’s in-force premium (the total value of all active policies) hit a record high of $747 million at the end of 2023, which was a 20% increase from 2022. Its gross loss ratio also fell 12 percentage points year over year to 77%, which means the company was paying out far less money as a portion of its active premiums. Lemonade’s long-term target for its gross loss ratio is 75% or less, so it’s already very close, although there will be bumps along the way as the company enters new markets.

Lemonade’s average premium per customer also closed out 2023 at a record high of $369, mainly because more customers opted for multiple policies. As the company’s product portfolio grows, it will create opportunities to satisfy more of its customers’ needs and collect more premiums.

The record results above sent Lemonade’s revenue soaring 67% in 2023 to $429.8 million. It was a whopping $50 million higher than what the company forecast at the beginning of the year.

Profitability is one of Lemonade’s largest challenges right now. The company is still in growth and expansion mode, which requires capital investment. That means it continues to lose money while it tries to achieve scale. However, its 2023 adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) loss of $172.6 million was a 23% reduction from its 2022 result, and further improvement is expected in 2024.

Management believes it can achieve profitability with the cash it already has on hand. This should ease investors’ concerns about large, dilutive capital raises in the future.

How Lemonade stock could be a millionaire maker

The insurance industry is enormous. The car insurance segment in the U.S. alone will bring in $364.9 billion in revenue during 2024, which means Lemonade has barely scratched the surface of its opportunity.

As I touched on earlier, Lemonade stock has declined by 90% since peaking at $164 three years ago. The 2021 tech frenzy carried its valuation to an unrealistic level, but the company’s underlying business has done nothing but grow since then.

Based on Lemonade’s $429.8 million in 2023 revenue and its current market capitalization of $1.1 billion, its stock trades at a price-to-sales (P/S) ratio of just 2.6. That’s near the cheapest level since it became a public company in 2020:

LMND PS Ratio Chart

I’m not suggesting this will happen in the short term, but if Lemonade stock reclaims its all-time high, it would represent a tenfold return from where it trades now. In other words, it could carry an investment of $100,000 today to $1 million. Plus, Lemonade would only be an $11 billion company at that point, a fraction of the value of industry heavyweights like Allstate, which is worth over $43 billion.

Insurance is a product most people need forever. Therefore, the fruits of Lemonade’s strategy to acquire young customers now will be enjoyed over the very long term. The company is on a positive trajectory, with solid growth across all major financial metrics. It may take one year or 10 years, but a recovery in the company’s stock price to its best-ever level is a strong possibility.

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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lemonade. The Motley Fool has a disclosure policy.

1 Up-and-Coming Artificial Intelligence (AI) Stock That Could Make You a Millionaire was originally published by The Motley Fool

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