BofA Reiterates Underperform on Lemonade (LMND) and Root (ROOT) Amid Weak Q1 App Downloads
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According to Shanker, Lemonade witnessed a 11% drop in app downloads In January and February of 2021 compared with the same months in 2020.
“The pace of decline appeared to decelerate further to 15-16% in the first three weeks of March. We believe this is of particular interest because Lemonade guided 2021 to what we describe as a slow start to 2021 with growth accelerating throughout the year. Management likely had a strong grasp of January/February results when it gave 1Q21 and FY2021 guidance on March 1. And yet, March seems a weaker month year-over-year compared with January and February,” Shanker wrote in a note sent to clients.
Root has been hit even harder as app downloads have halved in the first ten weeks of 2021, compared to a year-ago period. The situation seems to have improved in the meantime as app downloads surged 23% over the past two weeks (March 10-23), compared with the same two-week period in 2020.
“Perhaps there is something about the early days of the COVID19 pandemic that explains this, but it also seems evident that more drivers are using the app in March 2021 compared with February 2021 (albeit still down materially from a year ago). We believe that Root may be pushing itself into a new market with aggressive pricing and marketing, but we do not believe it intends to keep as many as half of the new customers it acquires during these growth spikes,” Shanker added.
The BofA analyst believes both companies are overvalued due as costs to buy a business may be higher than the value of those customers.
“Particularly, we are forecasting a miss in terms of customer additions for both companies this year. We believe the biggest risk to our Underperform rating arises from a steep drop in interest rates causing investors to migrate to businesses where most all the value lies in the tail cash flows matched by very modest discount rates. We also note sizable short interest, particularly in the case of Root, could cause a short squeeze similar to some other recent notable stock action,” concludes Shanker.
The analyst has price targets of $29.00 and $9.00 for shares of Lemonade and Root, respectively.
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