US insurance company was founded just over a decade ago. It uses AI at every stage of the insurance process, from selling policies to dealing with claims, though it still employs human staff, arguing that this helps cut administrative costs.

While it is true that AI is undoubtedly going to change the world, not every AI-related share is a compelling investment. To make a success of AI, a company must pass several tests.

First, it has to come up with a way of doing something more efficiently. Next, it must find a way to make money. It will need to fend off competition, both from incumbents and new entrants into the sector. Finally, even firms that meet all these criteria can become poor investments if the shares rise so far that they become overvalued.

Lemonade is still losing money

Lemonade says it spends approximately 5% of the money it earns from premiums on handling claims, as opposed to the 9% figure typical for the industry as a whole in the US.

Lemonade also believes that AI can significantly accelerate operations, with over half of claims paid out instantly and most policies sold in under 90 seconds. Lemonade is undergoing a period of rapid growth, with sales increasing from $94 million in 2020 to $738 million in 2025. Revenue is expected to keep expanding at around 30% a year.

But the company continues to lose money, with estimates suggesting that – at the very least – it will be in the red both this year and in 2027 (though management believes that the firm may start to achieve positive earnings before interest, taxes, depreciation and amortisation – Ebitda – in 2027).

The competition is catching up to Lemonade

Another difficulty is that while Lemonade may be ahead of the technology curve today, other companies are catching up by pouring large sums into AI. For example, rival Allstate announced this summer that it is launching ALLIE (Allstate's large language intelligent ecosystem), while other major competitors such as State Farm plan to use AI too.

And while Lemonade argues that its status as an AI-driven company will always give it an advantage over companies built around legacy systems, it also has to compete with other AI-driven companies, notably Root.

Lemonade could begin to turn a consistent profit and fend off competition from both new and old rivals. But investors still have to acknowledge that its valuation is relatively expensive.

It trades at 3.7 times sales, more than four times the 0.83 times sales that Allstate, a profitable and fast-growing company, sells for. Moreover, Root, which operates a similar tech-driven model but manages to turn a profit, only trades at 0.48 times sales. Furthermore, Lemonade's recent share-price performance suggests that investors are starting to sour on it. The stock has fallen by more than 50% from its 52-week high and has lagged the wider market over one, three, six and 12 months.

It is also below both its 50- and 200- day moving average. I would therefore go short at the current price of $46.46 at $45 a share. Put the stop-loss at $67.46, which gives you a total downside of £945.

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