How To Play Lemonade Stock Post Earnings

The folks over at insurance tech name Lemonade (NYSE: LMND) are quickly learning that what goes up, almost always comes down. Despite jumping more than 300% from last November through the start of January, shares have since lost their mojo and have been sliding hard. A 7% drop in Wednesday’s session alone puts them down 45% from November’s high. Considering the company only IPO’d in August, they’ve given investors a wild ride so far.

It’s unlikely that the fizz is gone forever from the New York-headquartered company, but one thing is for sure, this week’s earnings report didn’t do them any favors.

Lemonade reported their Q4 numbers after Monday’s bell and they quickly confirmed what most of Wall Street already feared. The sinking share price in recent weeks was more than justified as the pop from the end of last year was found wanting, with little fundamentals present to back it up. EPS was marginally ahead of expectations but still in the red, a fact that might have been overlooked if the topline revenue managed to knock it out of the park. But instead, revenue actually fell more than 12% on the year with weak forward guidance also spooking investors. The stock had managed to spend most of the previous month consolidating after January’s drop, but this week has seen it fall to fresh lows which is a worrying sign.

Playing The Long Game

In a letter to shareholders, management focused on the positives, such as crossing the one million customer count for the first time and growing in force premiums 87% year on year. But it doesn’t look like investors are buying it and we’re in the middle of some nasty price discovery that might take a while to play out.

It’s worth being patient with this one, as the future remains bright even if it doesn’t feel like it right now. For a four year old company, Lemonade isn’t doing too bad if it can boast a war chest of $1.2 billion, helped in part by a fresh raise in January. They’re also backed by some of tech’s hottest investors, including SoftBank, Google Ventures, and Sequoia Capital.

Only a few weeks ago, Piper Sandler was reiterating their Overweight rating and boosting their price target to $163. If you’re still on the sidelines today, that’s a fat 60% suggested upside from yesterday’s closing price to think about.

Getting Involved

There’s some support around the $90 level and it’s not too hard to imagine that being tested in the next few sessions as Wall Street continues to reel from what can at best be called a weak earnings report. But with the stock’s relative strength index (RSI) approaching 30, it’s reasonable to expect buyers to start stepping in and if shares can consolidate for a week or two, all the better.

We’ve seen how quickly Lemonade can rally if there’s a bit of hype about this. There’s no harm letting them lick their wounds for a little while longer and then giving them a second chance. In the long run this growth story is really only getting started.