Lemonade (NYSE: LMND) has taken investors on a wild ride since its initial public offering (IPO) in July 2020. The online insurance provider went public at $29, skyrocketed to a record high of $183.26 during the growth- and meme-stock rally in January 2021, but now trades at about $28.

Lemonade initially dazzled investors with its rapid growth, its popularity with younger customers, and its use of artificial intelligence (AI) chatbots to serve its customers and settle claims. However, it lost its luster as growth cooled, losses piled up, and rising interest rates depressed its valuation. The bears also questioned its ability to scale up its business and keep pace with larger insurance companies.

Image source: Getty Images.

With analysts’ price targets broadly ranging from $11 to $40, it is still a divisive investment. So should investors buy the stock before it breaks out of that price range? Let’s review its past problems and recent progress to decide.

What does Lemonade do?

Lemonade’s simple mobile app, AI chatbots, and streamlined onboarding process made it an attractive option for younger and first-time insurance buyers. At the time of its IPO, more than 70% of its customers were under the age of 35.

It initially sold only homeowners and renters insurance, and it subsequently expanded into term life, pet health, and auto insurance. In 2022, it acquired Metromile in an all-stock deal to accelerate the expansion of its auto coverage. Like its industry peers, it offered discounts for customers who bundled their policies.

Lemonade’s business is getting a little sweeter

Lemonade mainly gauges its growth through total customers, in-force premiums (IFP), and gross earned premiums (GEP). Ideally, those numbers should keep climbing as its adjusted gross margin widens and its gross loss ratio declines.

From 2021 to 2023, Lemonade’s growth in customers, IFP, and GEP all decelerated as its adjusted gross margins contracted. That slowdown suggested it was saturating its niche, struggling to keep up with its bigger competitors, and losing its pricing power.

Data source: Lemonade. YOY = year over year.

But in the first nine months of 2024, its growth in customers and IFP accelerated again as its adjusted gross margin widened. Its gross loss ratio also dropped to its lowest levels in four years. It attributed that recovery to higher rates, the expansion of Lemonade Car, and its stable retention rates.

For the full year, Lemonade expects its IFP to rise 26%, its GEP to grow by as much as 23%, and its total revenue to increase 21% to 22%. It also expects adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to improve from negative $173 million in 2023 to a range of negative $151 million to $155 million in 2024 as its net cash flow stays positive.

Those bottom-line improvements can be attributed to its rising IFP per employee — which has grown for 11 consecutive quarters as it lowered spending, relied more on its AI algorithms and chatbots, and scaled up.

Is it the right time to buy Lemonade?

With an enterprise value of $1.7 billion, Lemonade looks reasonably valued at 3.9 times this year’s estimated sales. But it’s still pricier than traditional insurers like Allstate, which is firmly profitable and trades at just 1.1 times this year’s sales.

Investors are still paying a premium for the stock because it’s growing faster and they believe Lemonade can disrupt traditional insurers with its AI-powered services. But most of its larger competitors have been upgrading their mobile apps and rolling out similar AI chatbots and services to attract younger buyers.

Lemonade more than doubled its customer base from 1 million at the end of 2020 to 2.3 million by the end of the third quarter of 2024. But it’s still a tiny player compared to market leaders like Allstate, which serves more than 16 million customers.

Lemonade probably won’t break even unless it gains millions of additional customers and economies of scale kick in, but that could take a very long time. It won’t go bankrupt anytime soon since it still had $979 million in cash, cash equivalents, and investments at the end of its latest quarter. But its high debt-to-equity ratio of 2.1 could make it tough to raise more cash at reasonable rates.

It has also increased its share count by more than 30% since its IPO with a secondary offering, its acquisition of Metromile, and its high stock-based compensation expenses.

Is it the right time to buy Lemonade?

Lemonade’s business is stabilizing, and its insiders bought nearly 16 times as many shares as they sold during the past 12 months. It’s worth taking a taste as it hovers near its IPO price, but I wouldn’t back up the truck unless it maintains its momentum and proves its business model is sustainable.

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Leo Sun 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.