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1 Question I Have for Lemonade

By Nicholas Rossolillo - Mar 6, 2021 at 7:24AM

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It's not a question that can be answered quickly, but rather will require patience for an answer over the next decade and beyond.

Lemonade (LMND -1.82%) has quickly turned into a battleground stock since it went public last year. This is a fast-growing company picking up lots of young customers and raving fans. But having just crossed 1 million insured (in record time for an insurance company, mind you) and $213 million in in-force premium on policies, its market cap around $6 billion flummoxes many investors.

This is a story stock. Shareholders are betting Lemonade can disrupt the status quo and set a new standard in tech-enhanced insurance. But it's not a winner yet. I have just one question for Lemonade: Can it sustain the rapid pace at which it has added new customers up to this point?

I'm not expecting an answer anytime soon. In fact, I think it's best that shareholders (myself included) and detractors alike not fixate on the company's results.

Man installing paneling in a house. A dog sits next to him.

Image source: Getty Images.

One company, two very different angles

I've had lots of people on the internet give me "advice" over the years, trying to convince me that a disruptive company I believed in was garbage headed for $0. Personally, nearly all of those times I was swayed, I later regretted the decision.

I'm not here to do the same to you if you already own or plan to buy Lemonade stock. Nor am I here to pump Lemonade to the moon. Truth be told, neither argument is correct -- at least not in the short to medium term. The truth is somewhere in the middle.

Here's the good: Lemonade reported its total customer count was up 56% at the end of last year to 1,000,802. In-force premium was up 87% to $213 million -- owing to the new products launched (it now offers renters, homeowners, pet, and life insurance, and many existing customers bundled subsequent to new product launches) and entrance into new markets.

Given that Lemonade has hinted it plans to use its tech- and AI-powered operation to expand into new types of insurance and a pipeline of new countries in Europe slated as "coming soon," it certainly appears Lemonade's recent momentum in adding new customers could continue.  

But there's some bad that should be acknowledged. As previously stated, Lemonade's $6 billion market cap is nonsensical when considering the company's small in-force premium total (not revenue; that was only $20.5 million) and that it also reported a fourth-quarter 2020 adjusted EBITDA loss of $29.7 million. Put simply, not only is this a tiny company, it's also a long way off from turning the corner on profitability.  

Throw all metrics out the window?

As with other tech companies, Lemonade's future is contingent on it collecting new customers. Customer count is an important metric. The more users a company has, the more options it has to promote revenue (and later, profit) growth down the road -- in this case via new higher-value insurance policies. With just over 1 million insured in the fold, Lemonade has a very long way to go before it can claim having changed the face of the insurance industry.

But growth stories like this play out over many years -- decades, even. That's why I'm ignoring most other metrics and just focusing on the company's ability to attract new customers. As is always the case, incumbents are countering with their own products aimed at young people. Perhaps this will eventually halt Lemonade in its tracks.

However, with $1.2 billion in cash and equivalents on the books and no debt (subsequent to a secondary stock offering in January), there's little risk Lemonade is going to zero anytime soon.  

That's not to say this won't be an incredibly volatile stock. Wild swings in valuation -- both up and down -- should always be expected here. If that's not your thing, Lemonade probably isn't for you. But for those who think the future is bright for Lemonade, the best thing you can do, especially if you're a new investor, is to keep investing. Keep saving (the more frequently the better) and keep adding to your stock holdings in your search for game-changing businesses.

It's going to take many years for this company to prove it can grow into a leader in the insurance industry. Patience will be required. If it is indeed doomed for failure, this will also require patience to be borne out. In the meantime, if you're a believer, keep your bet on Lemonade very small (it's still less than 0.5% of my portfolio) and add to it over time if the story stays positive.

At this point, fixating on Lemonade -- because you think it's either the greatest thing ever or an overpriced upstart ready to crash -- is counterproductive.

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