1 Artificial Intelligence Stock With 136% Upside, According to Wall Street

If you’re like me, you probably don’t enjoy dealing with your insurance company, especially when it comes to making a claim. The process can be inconvenient and time consuming, which adds extra stress to an already difficult event in your life. 

Insurance company Lemonade (LMND -0.73%) is using advanced technologies like artificial intelligence (AI) to reshape the industry — from the way it interacts with customers to the way it prices premiums. 

The company just announced its financial results for the second quarter of 2023, and while it showed strong growth, investors sent its stock 21% lower immediately following the report. Lemonade stock is now trading 89% below its all-time high, but one Wall Street firm is betting it could more than double from here.

I happen to agree, so here’s why the recent dip could be a great long-term buying opportunity.

Lemonade is using AI across its business

Lemonade sells renters’ insurance, homeowners’ insurance, pet insurance, life insurance, and car insurance — and that portfolio is growing. When a potential customer visits Lemonade’s website to buy a policy, they’re greeted by Maya, an AI-powered chatbot capable of writing quotes in 90 seconds. Similarly, its claims bot, AI Jim, can assess, process, and pay customers in three minutes. In fact, it currently holds a world record for the fastest-ever-paid claim — 2 seconds!

Customers clearly love the concept, because Lemonade had over 1.9 million of them at the end of Q2, which was an increase of 21% year over year. But the real AI magic happens behind the curtain, because Lemonade uses the technology to price premiums more accurately, and even to improve its business processes to reduce costs and maximize revenue. 

Its Lifetime Value 6 (LTV6) AI model is capable of informing Lemonade which geographic markets, and which products, are underperforming and overperforming so it can rapidly shift its priorities. It can also predict a customer’s lifetime value based on their likelihood of switching insurers and filing a claim. The company has since upgraded to the more accurate LTV7 model, with LTV8 due for activation this year.

Lemonade’s revenue more than doubled year over year to $104 million in Q2. Its in-force premium, which is the total value of all active-policy premiums, jumped 50% to a record-high $686 million. Its average premium per customer also set a new record at $360 thanks to Lemonade’s expanding product portfolio, which leads more customers to buy multiple policies.

Why, then, did Lemonade stock crash 21% immediately following the release of such strong results?

Lemonade is changing its customer-acquisition strategy

Lemonade usually acquires customers directly through its own marketing efforts, and for every $1 it spends to bring in a new customer, it earns $3 in gross profit over the long run. But it takes 24 months to earn back that initial $1, which constrains its ability to grow. In an effort to free up capital, Lemonade introduced a new concept called “synthetic agents” in June. 

Agents are nothing new in the insurance business. They help customers find suitable policies at the right price, and they take a commission based on the value of the premiums they bring to an insurer. It’s a win-win for everyone involved: The insurer gains a customer without having to spend money on advertising, the customer gets the best price, and the agent gets a slice of the action. 

Agents typically earn commissions for the entire life of the customer’s policy, which eats away at the insurer’s long-term profit margin. That’s where Lemonade’s new synthetic agent concept is different; it struck a deal with venture fund General Catalyst (GC), which will contribute $150 million toward Lemonade’s customer-acquisition costs over the next 18 months. GC will earn a 16% cut of the premiums paid by any customers acquired using those funds, but the commission ceases after two or three years (depending on the customer’s value).

All acquisitions will be done through Lemonade-branded channels, and all touchpoints with customers will be solely with Lemonade. There is no agent in the middle who can potentially take the customer away after they stop earning commissions. Following the commission period, the customer belongs to Lemonade, along with 100% of all future premiums. The result? The company expects to almost double the return on its customer-acquisition spend over the long run.

It’s an incredibly unique structure, but it’s brand-new, and investors never like uncertainty especially in this tough economic environment. Plus, Lemonade’s gross-loss ratio was quite high at 94% in Q2 because of abnormal weather events. That’s far above its long-term target of 75%, and now it’s paying commissions to GC, which makes reaching that target even more difficult.

But Lemonade stock could still soar from where it trades today

Despite the recent uptick in its gross-loss ratio, Lemonade believes it’s on track to achieve its goal rate of 75% in the long run. But until it does, it will be tough for the company to reach profitability, which is a key milestone investors are waiting to see because Lemonade has burned substantial amounts of money on growth over the last few years.

The good news is Lemonade expects to reach profitability with the resources it has on hand, and it doesn’t expect it will need a further capital raise. The synthetic agent deal with GC could help to extend its runway, because it will bring down short-term marketing cash burn. 

Still, it’s important for investors to remember Lemonade is very much a start-up in the insurance industry despite being in the game for 10 years. If it’s successful, the rewards will be enormous — U.S. car insurance alone was worth $348 billion last year — but it’s not a sure thing.

In the short term, Wall Street firm JMP Securities is betting Lemonade stock could soar 136% over the next 12 to 18 months to $40 per share. The stock has fallen so far from its all-time high that reaching that price wouldn’t even recover one-fifth of its losses, so JMP’s prediction isn’t unrealistic. 

As I mentioned at the top, dealing with traditional insurance companies is never fun. That’s why I think Lemonade has a real chance to succeed; if customers love the experience, the business will be a winner over the long term. At the current price, Lemonade stock presents an enticing risk-reward proposition for investors.