Lemonade is finally launching auto insurance. Now is the time to buy?

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It’s earnings season for many public companies, but investors in the digital insurance specialist Lemonade (NYSE: LMND) seem to be more interested in service expansion announcements than earnings announcements at this time. Lemonade officially entered the auto insurance business on Wednesday and now underwrites policies.

The big news is likely to be discussed further when the company releases its third quarter results on Monday, November 8, after markets close.

Both announcements are expected to be exciting news for the company and its investors, and Lemonade stock got a good 5% rebound on auto insurance news. But it was a short-term gain. Let’s see why a switch to auto insurance is important in the long run for this company and its actions.

Image source: Getty Images.

Enter its largest market to date

When Lemonade became a publicly traded company less than a year and a half ago, it only sold insurance to tenants and homeowners. Since then it has grown rapidly to now also offer pet and term life insurance policies. Since Wednesday, it also offers car insurance (only in certain markets for the moment).

Auto insurance is a big deal. It’s a much, much bigger market than all of the other markets in Lemonade put together. Management says this is a $ 300 billion opportunity – 70 times the renter market and three times the owner market. It’s almost like everything else is a training session to work on your system to get into the auto insurance business.

Since this is Lemonade, there are some important differences in its auto insurance model compared to traditional insurers. One is its use of telematics to determine the pricing of the policy. Telematics tracks driving behavior to assess risk, and it is not uncommon for modern insurance companies to use it when assessing clients to give a policy premium quote.

Lemonade’s main competitor in this area is probably Root (NASDAQ: ROOT), which also offers digital auto insurance using telematics. Lemonade car users will need to download an app that tracks driving behavior, and Lemonade will run data like driving speed, tight turns, etc. via its algorithms to determine a political price, safer driving generates lower prices. The platform also uses this data to see if there has been an accident or if a driver needs roadside assistance, which it offers.

Lemonade also encourages greener driving, and electric vehicles (EVs) or hybrids also benefit from a discount policy. Finally, in accordance with its social mission and its unusual advantages, Lemonade will plant trees to combat carbon pollution, the number of trees per customer corresponding to the kilometers traveled.

Can he succeed?

There are about a million reasons to suggest this business will go well – because Lemonade has over a million customers who already have insurance plans of some type. One of the foundations of its marketing model is to acquire customers for smaller plans and convert them to “lifecycle” customers with multiple policies. One of the hallmarks of the new car plans is bundling, and Lemonade offers additional discounts to customers who purchase a bundled package with another type of insurance. Given Lemonade’s high customer satisfaction scores, it can expect a strong performance from its existing base.

However, Lemonade Car is currently only available in Illinois, with Tennessee then being rolled out. It will therefore take time for Lemonade because to generate significant income for the high end.

A great victory for this growth stock

The market seemed happy with Lemonade’s announcement, and the stock, which has been declining since the summer, has finally gained ground. Investors seem more confident now because Lemonade has a huge market opportunity and the means to capture market share.

But potential investors should know that, even with the latest price hike, the Lemonade share price is still down 44.6% year-to-date and down 64% from record highs. 52 weeks established in mid-January. In the short term, the launch of automobile insurance will have no impact on the entire activity. But in the long term, there is a lot of potential here, and investors might consider buying shares of Lemonade while the price is still low.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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