The “Magnificent Seven” stocks are hogging the stock market’s spotlight these days. That makes perfect sense, of course. They are seven of the largest stocks by market value and among today’s most exciting growth stocks.

But this list won’t be the talk of Wall Street forever. Most of them also had membership cards to the older FANG group, which Jim Cramer defined in 2013 and expanded to FAANG four years later. But Tesla and Nvidia were minnows then, with market caps below $10 billion. Whoever joins the next snappily named list of elite growth stocks could be a much smaller company with big dreams right now.

On that note, let me show you an ambitious growth stock that could join the next market-defining club. I’m looking for massive target markets, a modest market cap, and aggressive dreams of long-term growth. Here’s how the innovative insurance specialist Lemonade (NYSE: LMND) checks every box.

Lemonade shouldn’t stay sour for long

The company’s car and home insurance sales are racking up too fast in some states, making the company’s artificial intelligence (AI) systems rely on insufficient local training data during the growth process. With slow regulatory approvals of new markets and higher insurance premiums, Lemonade ends up with uncomfortably high loss ratios and negative earnings. Despite a conscious effort to dampen marketing efforts, the exaggerated growth continues in early 2024.

That was the market’s main takeaway from Lemonade’s fourth-quarter report, published earlier this week. Share prices fell as much as 28% on Wednesday morning as investors looked past 31% year-over-year revenue growth and shrinking bottom-line losses to focus on conservative management commentary.

Typical seasonality will probably result in a higher loss ratio for the summer and fall quarters, reflecting America’s annual hurricane, wildfire, and damaging thunderstorm seasons. Many Lemonade investors were hoping for a brighter picture with steady quarter-by-quarter improvements to that crucial insurance-industry metric, but this company can’t control the climate. Unexpected weather patterns can always be a wildcard for any insurance investment.

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As a longtime Lemonade shareholder, I don’t mind slow and steady improvements to the company’s core business. I’m also fine with a bumpy road to the future wonderland of properly trained AI systems providing better risk calculations than any human ever could. The long-term vision remains the same — AI-based insurance will eventually offer optimal rates and features for every buyer of car and home insurance.

Adding Lemonade’s machine-powered plans to the mix should be like bringing a supercomputer to a chess tournament — so unbeatable, it’s basically cheating. That’s not the case yet, and some investors are losing patience with this development much too early.

Lemonade’s sweetening plans

Regarding the current business situation, Lemonade has plenty of tricks up its digital sleeve:

• The intentional growth slowdown is expected to reverse into an acceleration in the second half of 2024. Recent challenges are swinging around to become helpful trends instead. “Inflation seems to be receding, new rate approvals are adding up and earning in, and if the costs of capital come down, we may yet see a moderation in reinsurance costs too,” management wrote in the fourth-quarter earnings report.

• The company is seeking approval to sell car and home insurance in more U.S. states and a few European countries. And Lemonade’s slice of insurance premiums is tiny so far. The American car and home insurance sectors added up to a $586 billion opportunity last year. Lemonade’s serving accounted for a mere 0.1% of the domestic market for these essential insurance types, leaving them with enormous room for growth at home and abroad.

• The growth process may be painful at times, but it’s also a necessary step toward creating a lucrative insurance business for the long haul. “Ours, after all, is a business that grows in profitability as it grows in scale — and so grow we must.”

• So, the gear change into a renewed growth focus should give Lemonade’s financials a forceful push in the second half of 2024 and beyond. A rebound in the drooping stock chart won’t be far behind.

So, Lemonade’s fourth-quarter report didn’t scare me. The substantial price drop makes me want to double down on my existing investment. The road ahead will probably stay bumpy and uncomfortable for a while, so Lemonade may not be everyone’s cup of citrus drink. But if you can handle the turbulence, you should consider adding some Lemonade shares to your portfolio — on the cheap.

This disruptive innovator in a massive insurance sector deserves much more than a $1.1 billion market cap in the long run. It may not belong in the upper echelons of market-defining giants yet, but check again in a few years.

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Anders Bylund has positions in Lemonade and Nvidia. The Motley Fool has positions in and recommends Lemonade, Nvidia, and Tesla. The Motley Fool has a disclosure policy.

This Disruptive Innovator Could Join Tomorrow’s Growth Stock Elite in the Wake of FAANG and the “Magnificent Seven” was originally published by The Motley Fool