It has been an extremely hot year for IPOs despite the global financial markets mired in uncertainty during the COVID-19 pandemic. We have seen some very successful IPOs such as Snowflake (NYSE:SNOW), Unity Software, Inc. (NYSE:U), and BigCommerce (NASDAQ:BIGC), and some not so successful IPOs like Nikola Corporation (NASDAQ:NKLA). One company that has somewhat flown under the radar so far is Lemonade (NYSE:LMND) and it may be because of the industry it operates in. Insurance has never been a sexy sector by any stretch of the imagination, but it remains a staple of our society and a necessity for just about anything including home, pet, auto, travel, and life. On Thursday, shares of Lemonade tumbled by 8.22% as the stock dropped back down to $62.41 per share. Lemonade only had its IPO in July where the stock skyrocketed out of the gates, peaking at $96.51 just weeks into being a publicly traded equity. Since then, the stock has come back down to Earth, dipping as low as $44.11, before settling in the low to mid 60s.
Credit Suisse came out with a damning report for Lemonade as analyst Michael Zaremski downgraded the stock to an underperform rating and a new price target of $56. This represents a further 10% decline from where the stock closed on Thursday, and was enough to scare off investors from keeping their money in the company. Zaremski ran comparisons between Lemonade and industry leader Progressive (NYSE:PGR) that showed lower satisfaction in Lemonade than its peer. Zaremski also noted that currently, the costs are too high and the customer retention is too low for Lemonade to sustain profitability over the long-term. This is in line with a previous Goldman Sachs downgrade which rated Lemonade as a sell and gave a price target of an even lower $44.
All of this has soured investors on the once red-hot IPO investment. To be fair, the stock most likely overshot during its initial honeymoon phase as investors piled in and tried to get into the hottest new stock on the ground floor. But nearly every rapid growth company is unprofitable at the beginning, and Lemonade should be no different. At its core Lemonade is still a highly disruptive company that is revolutionizing an industry that is stale. Lemonade incorporates technology like artificial intelligence and machine learning into its insurance policies, an algorithm that over time should benefit the company in its efficiency and customer retention. Lemonade is targeting a younger demographic, which has a greater potential of locking in customers for life, or at the very least, a long-term horizon. Wall Street analyst downgrades are important to ponder, but at the end of the day much of these are opinions that can be crafted using any sample size or manipulated data. Industry disruptors are long-term market killers, just ask investors of Tesla (NASDAQ:TSLA) or Facebook (NASDAQ:FB). Lemonade has a long way to go, but if the stock dips too low based on all of this negativity, I would not be against starting a smaller position with a long-term outlook.
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