Revenues Tell The Story For Lemonade, Inc. (NYSE:LMND)

When close to half the companies in the Insurance industry in the United States have price-to-sales ratios (or "P/S") below 0.9x, you may consider Lemonade, Inc. (NYSE:LMND) as a stock to avoid entirely with its 3.5x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

See our latest analysis for Lemonade

What Does Lemonade's Recent Performance Look Like?

Lemonade certainly has been doing a good job lately as it's been growing revenue more than most other companies. 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 to 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.

Is There Enough Revenue Growth Forecasted For Lemonade?

In order to justify its P/S ratio, Lemonade would need to produce outstanding growth that's well in excess of the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 100%. Pleasingly, revenue has also lifted 281% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 36% each year as estimated by the six analysts watching the company. Meanwhile, the rest of the industry is forecast to only expand by 7.1% each year, which is noticeably less attractive.

With this in mind, it's not hard to understand why Lemonade's P/S is high relative to its industry peers. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Lemonade's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

You should always think about risks. Case in point, we've spotted 2 warning signs for Lemonade you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.