A divergence is growing between smaller, high growth stocks and larger, market-moving stocks (e.g. AAPL, TSLA). Funds already largely cycled out of many smaller stocks and now the withdrawals are coming from large caps. This is the cyclical nature. This also means that there are plenty of small caps which are quite attractive at their current levels.
A quick recap on why LMND is down ~90% from it's ATH last year:
Ok, ok, you still think LMND is a dog with fleas. That's fine. But let's also look at the macro. The whole market has been set on fire the last few months and left to burn. But LMND has found (what appears to be) a floor in the $16-17 range, wicking down several times between March and May and getting good support to retain the $20 level even when the rest of the market has been consistently selling off.
My (very personal) take is that the shorts that moved LMND from 180 -> 20 have mostly exited the first time that LMND hit $17. The movement since then has been largely market makers who are pinning the price since overall volatility is so high (covered calls at the money are returning 5% PER WEEK for market makers).
Just today, LMND wicked the 16 month trend line, showing a build up of demand that could shoot through with a larger market movement upwards. Taking a look at the QQQ more broadly, I show that it held onto a 2 year trend line. I also think that, at least for what information is available today, stocks are over sold. While I think there is more downside to come, after seven down weeks the market will revert to its short-term mean until it gets that additional bad news.
As a purely personal opinion, LMND is ready to be bought. I have long-term conviction here in their product and in where they are heading. Even if their revenue growth continues to slow, in 2 years they'll be at ~$350MM revenue annually and the larger they get the better diversification they'll have to protect against asymmetric risk events such as the Texas Freeze. Back of the envelope math, that 350MM at a simple 5x multiple puts LMND at 1.75B, or 30% higher than where they are today. Again, IMHO, this is conservative and doesn't take into account market and up-sell growth ops from MILE.
Finally, as mentioned before, option premiums are absurd on LMND right now. Covered calls that are 10% OOTM are returning 2% per week and a great way to offset some portion of the potential downside. The hardest thing to do is to buy when everyone is scared.
A quick recap on why LMND is down ~90% from it's ATH last year:
- LMND had a stupidly-low gross loss premium when they IPO'd, coupled with even more ridiculous growth numbers. But, management made an oopsie by being too aggressive and not putting enough money away for claims and, given the size of the company, when the Texas freeze happened it had an outsized impact on them, running the gross loss ratio up to 120%. The ratio currently sits ~90% but needs to be b/w 70-75% for LMND to excel. It's improving, just really, really slowly.
- LMND acquired MILE in an all-stock transaction, this brings a major up-sell opportunity to LMND as well as a larger market. This will undoubtedly jump start their foray into car insurance, but it comes with a big caveat: MILE, like LMKD, is also losing money hand over fist. At the end of 2021, LMND and MILE were losing a combined ~350MM/yr with a combined ~1.3B in cash (after liabilities). So they are OK in the near term, but this brings me to the final point:
- LMND anticipates closing the MILE acquisition this quarter. If your maths are good like mine, that means in the next 5 weeks. Investors didn't love the acquisition, but now that its happened, there is a chance they can use that magical executive jargon and synergize, reducing redundant costs while expanding cross-sell opportunities.
- LMND's growth is slowing, but it is still > 40% YoY
Ok, ok, you still think LMND is a dog with fleas. That's fine. But let's also look at the macro. The whole market has been set on fire the last few months and left to burn. But LMND has found (what appears to be) a floor in the $16-17 range, wicking down several times between March and May and getting good support to retain the $20 level even when the rest of the market has been consistently selling off.
My (very personal) take is that the shorts that moved LMND from 180 -> 20 have mostly exited the first time that LMND hit $17. The movement since then has been largely market makers who are pinning the price since overall volatility is so high (covered calls at the money are returning 5% PER WEEK for market makers).
Just today, LMND wicked the 16 month trend line, showing a build up of demand that could shoot through with a larger market movement upwards. Taking a look at the QQQ more broadly, I show that it held onto a 2 year trend line. I also think that, at least for what information is available today, stocks are over sold. While I think there is more downside to come, after seven down weeks the market will revert to its short-term mean until it gets that additional bad news.
As a purely personal opinion, LMND is ready to be bought. I have long-term conviction here in their product and in where they are heading. Even if their revenue growth continues to slow, in 2 years they'll be at ~$350MM revenue annually and the larger they get the better diversification they'll have to protect against asymmetric risk events such as the Texas Freeze. Back of the envelope math, that 350MM at a simple 5x multiple puts LMND at 1.75B, or 30% higher than where they are today. Again, IMHO, this is conservative and doesn't take into account market and up-sell growth ops from MILE.
Finally, as mentioned before, option premiums are absurd on LMND right now. Covered calls that are 10% OOTM are returning 2% per week and a great way to offset some portion of the potential downside. The hardest thing to do is to buy when everyone is scared.