Is this share price weakness a buying opportunity for me? Let’s take a look at the investment case.

Lemonade: strong growth

Lemonade has grown at a strong rate in recent years, and the group’s first-quarter 2021 results, posted on 11 May, showed that the company continues to grow.

At the end of the first quarter, Lemonade had 1,096,618 customers on its books – a 50% increase on the number of customers (729,325) it had at the end of Q1 2020. That’s an impressive level of customer growth.

Meanwhile, the group reported a premium per customer of $229 for the quarter (Q1 2020: $183) and ‘in force premium’ (customers x premium per customer = in force premium) at the end of the period of $251.7m (Q1 2020: $133.3m).

The Q1 results weren’t all great, though. On the downside, the company generated a net loss of $49m. That was up from a net loss of £36.5m in Q1 2020. We have seen recently that the stocks of companies that are not yet profitable can be crushed in a sell-off. So, the fact that Lemonade is not yet profitable means it is a higher-risk stock.

Looking ahead, Lemonade clearly expects to keep growing. By the end of 2021, it is targeting in force premium of $376m to $382m along with revenue of $117m to $120m.

It’s worth noting that the company is shortly about to launch a new car insurance offering – ‘Lemonade Car.’ It believes that this will “dramatically increase” its total addressable market (car insurance in the US is a $300bn market). Its 2021 inforce premium guidance currently includes no material contribution from car insurance.

Overall, the progress the company is making is quite encouraging, in my view.

Lemonade stock: my concerns

I do have some concerns about Lemonade stock, however.

One is that short interest is currently very high. According to data provider 2iQ Research, short interest at Lemonade is about 22% at present. This means that short sellers (sophisticated investors who are betting against the stock) are aggressively targeting LMND stock.

Another concern is a recently published open letter to CEO Dan Schreiber from short seller Muddy Waters. In the letter, Muddy Waters states that it discovered a security flaw on Lemonade’s website that potentially exposes its customers’ personal identifiable information (PII). The short selling firm states that Lemonade’s failures possibly implicate costly legal and regulatory breaches.

Finally, the valuation still looks steep even after the recent share price fall. Currently, LMND has a market capitalisation of $4.5bn. This means its forward-looking price-to-sales ratio is about 38. That seems a bit high, to my mind.

LMND stock: my move now

Weighing everything up, I see Lemonade stock as too risky for my portfolio right now. The company is growing quickly. However, its losses, its short interest, and its valuation concern me.

All things considered, I think there are better growth stocks I could buy.