Investors have proven many times that they will pay a serious premium for solid growth. If a company can transform an industry, even better. Lemonade Inc. (NYSE: LMND) wants to revolutionize the world of insurance. The company recently came public, and it uses artificial intelligence and data analytics to offer direct insurance to younger renters and homeowners for various insurance products to customers in the United States and Europe. Its insurance products are labeled as cheaper and more straight forward through a full stack of insurance carriers. The company’s view is that the insurance industry is by and large a dinosaur, or a horse-and-buggy industry.

What caught the eyes of Wall Street traders is that its above-range $29 IPO price had more than doubled, and Softbank backs this company. It covers stolen or damaged property, and personal liability that protects its customers if they are responsible for an accident or damage to another person or their property. The company also now even offers pet insurance, and it looks as though it may only be a matter of time before it expands its insurance offerings.

What is up for interpretation now is how the underwriting firms are viewing Lemonade. Its post-IPO quiet period has ended, and that means the analysts at the underwriting firms are free to cover the company.

Allen, Goldman Sachs and Morgan Stanley were the managing bookrunners for the IPO, and this matters considering how one of the firms gave a very weak rating and outlook based on the current share price having gone so much higher than its IPO. Barclays was also a bookrunner, and the co-managers were JMP Securities, Oppenheimer, William Blair and a firm called LionTree.

The call that stands out the most here is Goldman Sachs’s initiation with a Sell rating and a $44 target price. That is still handily above the $29 IPO, but Lemonade’s closing price last Friday was $77.97, and the shares traded up as high as more than $96 in the days immediately after the IPO.

The other bookrunners’ calls were more positive. Morgan Stanley’s rating was Equal Weight, and it assigned a $91 target price. Barclays Equal Weight rating comes with an $83 price target. As for other firms, JMP Securities issued a new Market Outperform rating with a $105 price target.

Lemonade generally retains a fixed 25% of premiums, and the company offloads excess claims by using reinsurers to limit its own risk. For the social aspect, the company’s IPO filing indicated that excess premiums usually are donated to customers’ nonprofit entities they choose in what the company refers to as an annual Giveback.

Lemonade’s IPO filing uses a lot of the buzzwords that are magic to the investing community these days: leveraging technology, data, artificial intelligence, contemporary design, behavioral economics, more delightful, more affordable, more precise, more socially impactful and so on. Its filing even said this:

A two minute chat with our bot, AI Maya, is all it takes to get covered with renters or homeowners insurance, and we expect to offer a similar experience for other insurance products over time. Claims are filed by chatting to another bot, AI Jim, who pays claims in as little as three seconds.

Lemonade obviously has a lot of room for growth as it seeks to grab market share. Revenues rose to $63.8 million in 2019 from $21.2 million in 2018, and the first-quarter sales in 2020 of $25.3 million were up from just $10.5 million covering the same period in 2019.

The big rub here is how much all the good news is factored in at the super-premium to the $29 per share IPO. Having close to $4 billion in market cap is tiny compared to other large insurance companies, but the valuation already has priced in massive growth and gains for years into the future.

Another issue is that Lemonade’s business model could be replicated and duplicated. The company claims that about 70% of its current customers are under the age of 35. It also noted that about 90% of its customers were not switching from another carrier.

Investors were not very excited by the analyst calls they have seen so far. Shares of Lemonade traded down over 7.5% at $72.10 on Monday.

Maybe this is just a reminder that there are instances when hot IPOs sometimes can be too hot right out of the gate, even if there is great opportunity ahead.

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