LMND

Lemonade, Inc.

18.73
USD
2.57%
18.73
USD
2.57%
15.99 114.80
52 weeks
52 weeks

Mkt Cap 1.15B

Shares Out 61.63M

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Lemonade: Ready For The Rebound

Summary After crashing more than 50% year to date, Lemonade is poised to benefit from a stock market rally. The company is now offering fuller insurance bundles in some select markets, and the initial cross-sell data is encouraging. The company is also expecting to see loss ratios improve as the price increases it filed for get approved. Lemonade has >$1 billion of cash on its balance sheet, enough to withstand years of losses as it continues to scale. Looking for more investing ideas like this one? Get them exclusively at Daily Tech Download. Learn More » Tech stocks that went public during the pandemic have all shown a fairly rapid "boom and bust" cycle, and insurtech company Lemonade (NYSE:LMND) is certainly no exception. Debuting in July 2020 at $29 per share, Lemonade stock skyrocketed very, very quickly above $160 before seeing all of those gains wiped out and then some. With so much pessimism layered into Lemonade and its loss-generating business in the 2022 market, it's almost difficult to remember what attracted investors to the stock in the first place: rapid growth rates, a portfolio of diversified insurance streams, and a healthy balance sheet. It's a good time now, in my view, for investors to review the bullish thesis for Lemonade as the stock is down ~50% year to date. For most of its life as a public company, I had been bearish on Lemonade. I criticized the company's sky-high valuation amid its massive losses and cautioned investors that this was a bubble waiting to burst, which it eventually did (and earlier than most other tech stocks; Lemonade started declining in summer of 2021, whereas most of its tech peers started correcting in November). Earlier this year, however, as Lemonade broke below $30 per share, I switched my opinion to bullish, and that's where I remain today: I encourage investors to fully take advantage of the dip to buy. Here, in my view, is the full rundown of reasons to be bullish on Lemonade: Enormous growth rates showcase the largesse of its market opportunity. Lemonade is nearly doubling its revenue on a y/y basis. And though the current market is very nonchalant about impressive growth rates, to me this shows a business that is still very much in its nascency and able to scale to much greater heights. Lemonade is the new way to buy insurance. Gone are old-school insurance agencies and insurance agents; nowadays, just like everything else, we buy insurance online. As the new generation of tech-savvy millennials and younger cohorts dominate the consumer base, insurtech vendors like Lemonade will gain market share versus their legacy counterparts. Building a full insurance flywheel. When it started out, Lemonade just offered home and renters insurance. Now, the company is also offering bundles with pet insurance and car insurance as well (the latter through its acquisition of Metromile). Perhaps in no other industry is diversification more vital than in insurance, so Lemonade's ability to continue growing into other insurance streams will be critical to its success. Loss ratios are set to improve. Lemonade filed for ~100 rate changes that are pending approval. Once these are in place, the company's loss ratios will move closer in line with its long-term targets. One other chief reason to be enthused about Lemonade: it's basically trading for next to free. At current share prices near $21, Lemonade trades at a market cap of $1.30 billion. After we net off the $1.01 billion of cash on the company's most recent balance sheet, its resulting enterprise value is just $286 million. That represents just 1.4x EV/FY22 revenue, and 0.5x EV/FY22 in-force premium. Recall, meanwhile, that Lemonade acquired Metromile for roughly 2x its in-force premium. There's no question that there's a lot of pessimism baked into Lemonade's share price now. I'd argue, however, that despite Lemonade's current losses, it has both a path to improvement (through rate increases/scale growth) as well as the means with a $1 billion cash hoard to absorb near-term losses without needing to worry about raising additional capital. Right now, a lot of stock prices are truly disconnected from their fundamentals, and Lemonade is a strong example of this. Take advantage of the recent selling mania as a well-timed buying opportunity. Q1 download Let's now go through Lemonade's most recent quarterly results in greater detail. The Q1 earnings summary is shown below: Lemonade's revenue grew at a stunning 89% y/y pace to $44.3 million, beating Wall Street's expectations for $43.2 million (+84% y/y) by a five-point margin. Note as well that this is all purely organic as of now; the company doesn't expect the Metromile acquisition to close until Q2. The company also added $39 million in net-new IFP this quarter and grew its IFP base by 66% y/y (see chart below). As a reminder, in-force premium is the sum total of the premium streams that Lemonade has at a given point in time: The company grew IFP both by expanding its customer base as well as growing the average premium per customer; the latter of which is driven by both the trend of policyholders "graduating" from rental insurance to house insurance as well as adding pet and auto insurance to the bundle. In Q1, Lemonade added 77k net-new customers (more than 63k in Q4, by the way) while premium per customer rose 22% y/y to an all-time record of $279. Q1 was the first quarter in which all four Lemonade insurance products - renters, home, pet, and auto - were available in certain markets (for now, just Illinois and Tennessee). However, the results that the company saw from this offering have been encouraging to date: 40% higher bundle rates in Illinois compared to the rest of the U.S. Two-product customers outspent single-product customers by 3:1, and three-product customers by 7:1. Annual dollar-based retention in Illinois was 80%, versus 72% for the rest of the U.S. One word on loss ratios: net loss ratios in Q1 were 89%, better than 98% in Q4 but still shy of the company's target of 75%. Note, however, that Lemonade has a path to seeing loss ratios glide back up to target through rate increases, and that the company considers loss ratios a lagging indicator versus the actions it has already taken to improve them. Per President Shai Wininger's prepared remarks on the Q1 earnings call: As we've spoken about before, loss ratios are lagging indicators, and changes in pricing, underwriting and segmentation take time to develop and then get approved through regulatory filings and yet more time to earn in. This lag between action and results is a structural reality of insurance, which is why we use predictive machine learning models rather than backward looking loss ratios in our day-to-day management. As much of the broader insurance industry has reported, Q1 loss ratios were more significantly impacted by inflation as claims have quickly adjusted for inflation, while rates can take months to adjust. We've been working hard to combat this with corrective measures, and in the past year have filed about hundreds of applications for rate changes. As regulatory approvals come in, we look forward to bringing rates back in line with risk. So while our target multiyear average loss ratio below 75% remains unchanged, it's important to remind our shareholders that while loss ratios spike from time to time, we have reinsurance in place to help insulate us from such bumps. Indeed, this quarter, we're reporting a 23% gross profit margin at a better-than-expected EBITDA, notwithstanding the heightened loss ratio." I'd say that, with Lemonade still growing at a ~90% y/y clip (and this doesn't even yet include the Metromile acquisition), it's still too early to judge the company's loss ratios and ultimate profitability. Key takeaways Lemonade is one of the clear leaders in marketing insurance products online and through apps. Its interface is easy to use (I'm a customer myself) and its products are simple to understand, which is what will ultimately let Lemonade win out over legacy vendors. Take advantage of the stock's current rough patch to build up a stake. For a live pulse of how tech stock valuations are moving, as well as exclusive in-depth ideas and direct access to Gary Alexander, subscribe to the Daily Tech Download. Highly curated focus list has consistently netted winning trades of 40%+. This article was written by With combined experience of covering technology companies on Wall Street and working in Silicon Valley, and serving as an outside adviser to several seed-round startups, Gary Alexander has exposure to many of the themes shaping the industry today. He has been a regular contributor on Seeking Alpha since 2017. He has been quoted in many web publications and his articles are syndicated to company pages in popular trading apps like Robinhood. Disclosure: I/we have a beneficial long position in the shares of LMND either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Comment

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