“The stock market is a device for transferring money from the impatient to the patient.” Warren Buffett

Lemonade is a very intriguing company because it is disrupting the insurance industry. Lemonade is less than 10 years old yet it is competing with legacy insurance companies over 100+ years in the business! Although they are unprofitable and on the higher risk of investments, I believe the risk-reward profile is justifiable given the rewards are 5-10x, possibly much higher. I will hold the stock for several years may be much longer. I understand the insurance industry isn’t going to change overnight and that’s not something people want to hear who have made massive gains in cryptocurrencies or meme stocks. With a little patience, I think Lemonade is worth holding in an investor’s portfolio.

Competitive Advantage: Artificial Intelligence.

AI, Forensic Graph Network, behavioral economics, machine learning, data points, etc. Basically, this is Lemonade’s secret sauce. I don’t want to get so much in the science of this competitive advantage but just that Lemonade is AI-powered while the majority of their competitors are not. The thesis for Lemonade is their AI better assesses risk, lowers loss ratio, creating a more efficient business model, which will eventually lead to higher growth and profit margins.

Network Effects

The term network effect refers to any situation in which the value of a product, service, or platform depends on the number of buyers, sellers, or users who leverage it. Typically, the greater the number of buyers, sellers, or users, the greater the network effect—and the greater the value created by the offering.

There are tons of examples of how network effects work. Companies like Facebook, eBay, Amazon, or Google are valuable because a lot of people are on the platform. The fewer people in their ecosystem, the less valuable the company becomes.

So is there a network effect happening in Lemonade? I believe so:

Lemonade ranks highest for Renters Insurance for 2021 in J.D. Power Study. There are some key nuggets in this study. Three of the biggest reasons why people stick with a certain insurance company long-term are trust, good service experience, and convenience. Price is obviously important but not the main driving factor for sticking with an insurance company.

From my conclusion, Lemonade’s AI is creating a network effect and the proof is in their high customer growth rate. Another thing I like about Lemonade is its high customer ratings. Owning a Lemonade policy myself, I have to say the process was convenient, easy, and fast compared to going with a legacy carrier like State Farm or Allstate. This customer-first-centric business model goes into the premise if you create a company that provides a superior experience, consumers will better trust the company and be willing to pay more. Luckily for Lemonade, it won’t be that hard to win in this area. Who do you know that passionately likes their renters or car insurance company? The fact Lemonade donates part of your unclaimed premiums to charities provides that good feeling deep inside you typically never get with an insurance company. Through Lemonade’s giveback program, as their network grows, so does their social impact. More policyholders equal more revenue plus more good for society. It’s a rather genius business model if you ask me.

I believe in order to be a good investor you have to have your chips on the table. You are typically not going to get massive returns after a stock has made its big move. With Lemonade the hype and momentum are justified although the insurance industry is a bit slow-moving and lacking innovation. Those investors that are patient could see massive gains. Every additional Lemonade policyholder adds value in an exponential way. This is the network effect in play. When something has a network effect it is a rule and law that cannot be broken. Legacy insurance companies have their own network effect however there are three ways to stop a network effect: government regulation, technological failure, and significantly better competitor arriving. I believe Lemonade is that competitor that will lead consumers to swap out their insurance policies. Given how big the insurance space is and depending on how well Lemonade executes and harnesses its network effect, I could see this growing from a 2-3x bagger to something even more incredible in the range of a 10-20x bagger.