When you see that almost half of the companies in the Insurance industry in the United States have price-to-sales ratios (or "P/S") below 1x, Lemonade, Inc. (NYSE:LMND) looks to be giving off some sell signals with its 2.8x 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.
NYSE:LMND Price to Sales Ratio vs Industry February 5th 2024
How Lemonade Has Been Performing
With revenue growth that's superior to most other companies of late, Lemonade has been doing relatively well. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. If not, then existing shareholders might be a little nervous about the viability of the share price.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Lemonade.
Is There Enough Revenue Growth Forecasted For Lemonade?
There's an inherent assumption that a company should outperform the industry for P/S ratios like Lemonade's to be considered reasonable.
Retrospectively, the last year delivered an exceptional 93% 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. Accordingly, shareholders would have been over the moon with those medium-term rates of revenue growth.
Turning to the outlook, the next three years should generate growth of 22% per annum as estimated by the eight analysts watching the company. That's shaping up to be materially higher than the 6.8% per year growth forecast for the broader industry.
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 Bottom Line On Lemonade's P/S
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.
Our look into Lemonade shows that its P/S ratio remains high on the merit of its strong future revenues. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.
We don't want to rain on the parade too much, but we did also find 1 warning sign for Lemonade that you need to be mindful of.
If you're unsure about the strength of Lemonade's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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.