Lemonade, Inc. (NYSE:LMND) Shares Slammed 27% But Getting In Cheap Might Be Difficult Regardless

Lemonade, Inc. (NYSE:LMND) shares have had a horrible month, losing 27% after a relatively good period beforehand. Longer-term, the stock has been solid despite a difficult 30 days, gaining 17% in the last year.

Although its price has dipped substantially, when almost half of the companies in the United States' Insurance industry have price-to-sales ratios (or "P/S") below 1x, you may still consider Lemonade as a stock probably not worth researching with its 2.5x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

View our latest analysis for Lemonade

How Lemonade Has Been Performing

With revenue growth that's superior to most other companies of late, Lemonade has been doing relatively well. The P/S is probably high because investors think this strong revenue performance will continue. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on analyst estimates for the company? Then our free report on Lemonade will help you uncover what's on the horizon.

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, Lemonade would need to produce impressive growth in excess of the industry.

Retrospectively, the last year delivered an exceptional 30% gain to the company's top line. This great performance means it was also able to deliver immense revenue growth over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Shifting to the future, estimates from the nine analysts covering the company suggest revenue should grow by 26% each year over the next three years. That's shaping up to be materially higher than the 3.8% each year growth forecast for the broader industry.

With this information, we can see why Lemonade is trading at such a high P/S compared to the industry. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Lemonade's P/S

Despite the recent share price weakness, Lemonade's P/S remains higher than most other companies in the industry. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

We've established that Lemonade maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Insurance industry, as expected. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. It's hard to see the share price falling strongly in the near future under these circumstances.

It is also worth noting that we have found 1 warning sign for Lemonade that you need to take into consideration.

If these risks are making you reconsider your opinion on Lemonade, explore our interactive list of high quality stocks to get an idea of what else is out there.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.