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1 Magnificent Artificial Intelligence (AI) Stock to Buy in May

Artificial intelligence (AI) is a new tool for most companies, but not for Lemonade (LMND -2.03%). It has used the technology to transform the insurance industry since 2015, and it’s resonating with consumers who are fed up with traditional practices.

Lemonade uses AI to autonomously write quotes, process claims, calculate premiums, and even to determine where it should invest its marketing dollars. The end result is an insurance platform that is both more convenient and cheaper (in many cases) for customers.

The stock is trading 89% below its all-time high set during the tech frenzy in 2021. Its valuation was a little irrational back then, but the company has grown significantly across all metrics ever since. In fact, after it recently reported financial results for the first quarter of 2024, the stock immediately popped 10% in after-hours trading.

Here’s why Lemonade could carry that momentum through the rest of May — and beyond.

Recreating the insurance experience with AI

Lemonade had nearly 2.1 million customers at the end of Q1, which represented an increase of 12.9% from the year-ago period. Studies show it is incredibly popular among younger consumers, including those who might be taking out insurance for the first time. However, the company also pulls many of its customers away from traditional, entrenched insurance giants, which highlights the appetite for change.

Uptake has been rapid considering Lemonade was only founded nine years ago and operates in only five countries: the United States, Germany, France, the United Kingdom, and The Netherlands. Lemonade also offers just five products at the moment, including renters’ insurance, homeowners’ insurance, life insurance, pet insurance, and car insurance. In other words, there is plenty of scope for this company to expand both its product portfolio and its geographic footprint.

As I mentioned at the top, AI is a huge proponent of its success to date. Lemonade’s AI chatbot, Maya, can present a quote to a potential customer in under 90 seconds, and its other AI bot, Jim, can pay claims in three minutes without human intervention. It’s a welcome departure from the traditional claims process which often involves multiple phone calls and lengthy waiting periods.

But Lemonade’s use of AI runs much deeper than the customer experience. The company launched its Lifetime Value 6 (LTV 6) model in 2022, which predicted things like customer churn rates, the likelihood of a claim, and the likelihood of a customer buying multiple policies, in order to price premiums more accurately. Plus, it analyzed the performance of products and geographic markets to help Lemonade pivot its marketing strategies more quickly. The company is now using LTV 9, with each new version more accurate than the last.

AI also helps Lemonade manage core metrics like its loss adjustment expense (LAE) ratio, which measures the cost of managing claims. An LAE of 10% is typical across the insurance industry, but Lemonade’s is just 7.6% thanks in part to its highly automated claims process. In fact, Lemonade was able to shrink its headcount by 11% over the past year even though its insurance book surged 22%, which is a testament to the power of AI.

Growing revenue and shrinking losses are a recipe for happy investors

Lemonade’s in-force premiums (the total value of all active policies) hit a record-high of $794 million in Q1, which was up 21.5% year over year. At the very same time, its gross loss ratio fell eight percentage points to 79%, and it’s on a clear trajectory toward the company’s long-term target of 75%.

The gross loss ratio measures how much Lemonade pays out in claims as a percentage of the premiums it takes in, and 75% or below tends to be the sweet spot for a thriving insurance business. There will be bumps along Lemonade’s journey to that target when it enters new countries and releases new products, because it takes time to achieve scale.

Lemonade’s average premium per customer also hit a record high of $379 in Q1, and it has climbed consistently over the past couple of years as more customers opt for multiple policies.

All of the above translated to record revenue of $119.1 million in Q1, which represented growth of 25.1% compared to Q1 2023. Considering the company’s operating costs only increased by 2.7%, Lemonade managed to reduce its net loss by 28.1% to just $47.3 million.

Reaching profitability has been a focus for Lemonade’s investors, and management now expects it could be cash flow positive by the end of 2024. That was brought forward from the prior guidance that suggested Q1 2025, and it’s a key reason Lemonade stock popped 10% following its earnings report. The milestone will ensure the company can stand on its own two feet without requiring further capital injections.

Why Lemonade stock is a buy now

As I touched on earlier, Lemonade stock is down 89% from its all-time high of $164. Investors carried its valuation to unrealistic heights during 2021 amid a frenzy in the tech sector, but its subsequent decline might present a golden opportunity considering the strong progress in the company’s underlying business.

Plus, Lemonade’s opportunities in the insurance business are gigantic. The U.S. car insurance industry alone is projected to bring in $364.9 billion in revenue during 2024, so the company has barely scratched the surface of its addressable market.

Based on Lemonade’s trailing-12-month revenue of $453.7 million and its current market capitalization of $1.3 billion, its stock trades at a price-to-sales (P/S) ratio of just 2.8. That’s nearly the cheapest level since the company went public four years ago:

LMND PS Ratio data by YCharts

Insurance is a product most people buy forever, and Lemonade’s focus on technology is attracting younger customer cohorts who could have the highest lifetime value. Plus, the company has barely penetrated the markets in which it currently operates, and there are so many others it hasn’t even entered yet.

As a result, Lemonade stock might be a great buy right now, especially after its strong Q1 report.

This post appeared first on fool.com

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