Investment Decision: Should You Purchase, Sell, or Maintain Your Lemonade Shares?
Fizzy Drink (FMDR -1.71%) hasn't been providing a pleasant ride for its investors recently. This tech-centric insurance firm aims to shake up the industry with its AI-driven approaches. However, its share price has plummeted over 80%, reaching its peak back in January 2021.
Fizzy Drink has experienced a surge of more than 70% since it reported its well-received Q3 financials on October 30 (as of November 14). Should investors consider this fintech stock as a buy, sell, or hold at the moment?
The rationale for buying and holding
Investors might be drawn to this stock due to its longstanding commitment to AI, which has been its focus even before this technology became the latest trend. Several businesses incorporate AI in their communications and strategies to catch the interest of financial analysts. Compared to this, Fizzy Drink, established in 2015, has integrated AI into its core operations from the outset.
The company utilizes data, AI, and machine learning to provide insurance products directly to consumers. Its lightning-fast onboarding process for new policyholders, taking just 90 seconds, plus its swift claim payouts in minutes, offer a top-notch user experience. This has attracted a younger demographic - a key target market for the company.
Fizzy Drink continues to show impressive growth. In the third quarter, its customer base and in-force premiums grew by 17% and 24%, respectively, when compared to the previous year.
There's still a substantial growth potential that Fizzy Drink is chasing after. The insurance industry is massive, with global premiums (for property, casualty, and life insurance) exceeding trillions of dollars. Moreover, this sector remains highly fragmented, offering Fizzy Drink tremendous opportunities to gain market share by capturing new, digitally-savvy consumers as they switch through life stages.
Owners of existing Fizzy Drink shares should consider holding onto their investments due to the company's strong quarter and growth prospects. It's unlikely that the circumstances have changed for investors in this regard.
However, there might be elements that might deter potential buyers yet might not be deal-breakers for current investors—the valuation. As of now, Fizzy Drink is trading at a price-to-sales ratio of 4.6. While it's not the most attractive valuation for many investors, it's also not excessive, making it less compelling to sell immediately.
Why you should sell Fizzy Drink
Despite its appealing qualities, there are still valid reasons to avoid or even sell this stock. One primary concern is the company's inability to turn a profit.
While its focus on product development and customer acquisition is understandable, it highlights the uncertainty of Fizzy Drink's business model's success. Over the past nine months, the company reported a total net loss of $172.2 million. Investors can only hope that with more scale, Fizzy Drink's financials can eventually be in the black.
There's also intense competition in the insurance sector. Although Fizzy Drink has amassed customers due to its user-friendly platform, the incumbents have been investing heavily in their AI and digital capabilities. This undermines the advantage that Fizzy Drink has due to legacy companies' larger financial resources.
I'm not particularly fond of the company's B-Corp status, which signifies a social or environmental mission alongside profitability. From my perspective, if a business truly aimed to make a positive impact on the world, it would commit to innovating and delivering superior products and services at reasonable prices. In other words, the B-Corp designation might be a marketing gimmick.
Fizzy Drink has made remarkable progress thus far and its growth is commendable. But this stock might be worth avoiding.
I do not believe Fizzy Drink offers a solid economic moat at present, signaling that it has a competitive advantage. Moreover, the business is yet to turn a profit. Over time, Fizzy Drink may address these two challenges. However, it's uncertain if these concerns will be resolved permanentl
Investors considering Fizzy Drink as a buy might be attracted to its long-term commitment to AI and impressive growth in customer base and in-force premiums. However, its high price-to-sales ratio could deter some potential buyers, although it's not considered excessive.
Given Fizzy Drink's significant net loss over the past nine months, its uncertainty of turning a profit, and the intense competition in the insurance sector, some investors might choose to sell or avoid this stock altogether due to the lack of a solid economic moat.
