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Buy-side equity analysts can be useful. They often come with advanced financial skills and training, vetted by many years or even decades of experience in money management. So it might make sense to see what Wall Street professionals are saying about your next investment idea.
That said, they don’t always have the right answers or the best analysis. In most cases, analysts’ consensus stock ratings are a look back at recent events – not insightful projections of what might happen in the future.
De Straat was only moderately enthusiastic about it Nvidia before the ChatGPT release made it a market darling. When Netflix (NASDAQ:NFLX) was a no-brainer purchase in the wake of the Qwikster crisis of 2011Analyst consensus on that stock was a hold, with a slight tilt to the bearish side. That turned out to be a great time to buy Netflix stock, with a return of more than 5,300% over the next twelve years.
So the analysts aren’t always right, even if their average recommendation is unusually bearish. For that matter, Wall Street’s attitude toward computerized insurance companies Lemonade (NYSE:LMND) reminds me of the old Netflix miscalculations right now. The consensus recommendation is a hold, with slightly more sell than buy peaks.
I think this recommendation will go down as one of the classic blunders. This is why Lemonade stock appears poised to rise from this low.
The market consensus on lemonade
Lemonade’s current analyst rating is slightly bearish. Of the ten analyst firms that rate the stock, six maintain a middle-of-the-road recommendation. One stands out with a buy recommendation, while three suggest some kind of sales action.
Judging from their questions on Lemonade’s latest earnings call, bearish analysts are concerned about the company’s exposure to catastrophic claims, or CAT. An abundance of damaging winter storms led to an unfavorable gross loss ratio, which weighed on Lemonade’s profitability.
It is more difficult to determine the motivation for the sole bullish rating of Karol Chmiel of the Citizens JMP group. The analyst rarely asks questions about the company’s earnings numbers, and JMP is not keen on publicly publishing its research reports.
The bullish case for Lemonade
So here’s my own Lemonade analysis instead. I have been a long-time shareholder in this innovative insurance company, which began relying on artificial intelligence (AI) to manage its core businesses long before it was cool.
Lemonade’s automated approach makes immediate sense to me from a consumer perspective. Traditional insurance adjusters, such as Progressive or All statesrely on human agents to acquire, sign up, review, and manage customers. The process is prone to human error at every stage, and it makes perfect sense to take the emotion out of this business with automated automation.
The deep learning systems that handle Lemonade’s insurance policies and claims aren’t perfect either. In fact, these systems have made many imperfect decisions to date, resulting in painfully high loss ratios and negative business results.
But the point is, Lemonade’s insurance systems make suboptimal decisions for the business at first while building a larger knowledge base and deeper understanding of the insurance industry. Every insurance company becomes more financially stable as its operations grow, and that’s even more true for Lemonade, with its direct reliance on real-world data from actual customers and concrete insurance claims.
So it’s a learning process, and Lemonade is still a long way from building the perfect robot insurance solution. At the same time, the company is indeed scaling rapidly and positioning itself for long-term success.
How Lemonade can compete with industry giants
I mean, look at Lemonade’s revenue compared to the insurance giants I mentioned earlier. This company is essentially a rounding error next to the huge revenue streams of Progressive and Allstate:
But the picture changes dramatically if I switch to percentage sales growth instead. This time it’s the giants of this industry who look flat-footed:
Lemonade is indeed growing in many ways. In the recent Q2 report, customer numbers increased 14% year-over-year. The average insurance premium per customer increased by 8%, increasing the total amount of current premiums by 22%.
And the policy-making machines learn a lot from this growing customer base. Lemonade’s gross profit doubled in the second quarter, its net loss ratio is improving over time, and the company achieved $4 million in positive net cash flow in this report.
Why I think Lemonade is a fantastic purchase today
My view on Lemonade is quite simple: I see an innovative AI expert aiming to shake up the vast and often inefficient insurance industry. The company is young and still has a lot to learn, but recent profit figures show that Lemonade is starting to get a grip on the situation.
So I’m convinced Lemonade is a future insurance giant in the making, and bearish analysts are making another Netflix-like mistake. Lemonade stock is a no-brainer buy right now, and I can’t wait to see how the company will hone its AI-powered insurance prescriptions in the coming years. One of these days, AI-managed insurance could very well become the industry standard, and Lemonade would stand out as a gray leader at that point.
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Anders Bylund has positions in Lemonade, Netflix and Nvidia. The Motley Fool holds and recommends positions in Lemonade, Netflix, and Nvidia. The Motley Fool recommends Progressive. The Motley Fool has one disclosure policy.
Wall Street analysts are bearish on this artificial intelligence (AI) stock. Here’s why I’m not. was originally published by The Motley Fool