Could Lemonade Be a Millionaire-Maker Stock?

Lemonade (LMND -0.98%) was one of the hottest IPOs of 2020. The online insurance company went public last July at $29 per share, closed above $69 on the first day, and is now worth nearly $100.

Lemonade's platform offers a streamlined way for users to sign up for home, renters, life, and pet insurance policies. By using artificial intelligence and chatbots, Lemonade can insure users within 90 seconds, and process their claims and payments within three minutes.

A father makes lemonade with his daughter.

Image source: Getty Images.

Lemonade charges a flat fee for its services, and it usually donates its excess premiums to nonprofit organizations selected by its customers. This socially conscious approach earned it a B Corp certification, which is reserved for companies that prioritize social and environmental values.

Lemonade is pulling many consumers, especially younger ones, away from older insurance companies with byzantine rules. The median age of the platform's entry-level customers is about 30, while its higher-end policies are gradually attracting older users.

It's easy to see why Lemonade's disruptive business model, which it calls "insurance built for the 21st century," has impressed investors. But can Lemonade's growth rates actually support its soaring valuations?

How fast is Lemonade growing?

Lemonade's revenue has soared since the platform's initial launch in 2016, but its bottom line remains deep in the red.

Fiscal Year	2017	2018	2019	2020
Revenue	$2 million	$23 million	$67 million	$94 million
Net Income (Loss)	($28 million)	($53 million)	($109 million)	($122 million)

Data source: Lemonade.

On the bright side, three of its core growth metrics -- its gross written premium (GWP), its net losses per dollar of GWP, and its gross loss ratio -- are all headed in the right directions.

Fiscal Year	2017	2018	2019	2020
GWP	$9 million	$47 million	$116 million	$214 million
Net Loss per Dollar of GWP	($3.12)	($1.13)	($0.94)	($0.57)
Gross Loss Ratio	161%	113%	79%	71%

Data source: Lemonade.

Simply put, Lemonade is attracting more users, selling more insurance plans, and taking smaller losses on each plan. As a result, its gross and adjusted EBITDA margins are gradually improving, thanks in part to its use of AI and chatbots instead of human customer service representatives.

Lemonade's total number of customers grew from just 308,835 at the end of 2018 to just over a million at the end of 2020. Its average premium per customer rose from $145 to $213 during the same period.

Approximately 70% of Lemonade's customers are under the age of 35, and roughly 90% of its customers had no plans to switch to other carriers. That stickiness makes it a great play on the millennial market, and its average premiums could continue climbing as its aging customers purchase more expensive plans or Lemonade rolls out additional insurance services.

The short-term and long-term outlooks

Lemonade expects its revenue to rise 21%-24% in fiscal 2021, but that growth rate isn't entirely comparable to the prior year due to a change in its reinsurance structure in the second half of 2020.

Image source: Getty Images.

Instead, Lemonade says its gross earned premium, or the earned portion of its GWP, is a clearer indicator of its growth. It expects its gross earned premium to increase by 70%-73% for the full year.

But on the bottom line, Lemonade expects its adjusted EBITDA loss to widen significantly as it pays out claims related to the winter storm across Texas and other states in February.

Texas accounted for over a fifth of Lemonade's GWP last year, making it its second-largest market after California. California also remains a highly volatile market, due to the ongoing threat of wildfires, earthquakes, and other natural disasters.

Based on these near-term expectations, Lemonade's stock looks expensive at over 50 times this year's sales. Many traditional insurance stocks, such as Allstate (ALL -0.20%) and The Travelers Companies (TRV 0.78%), trade at about one times this year's sales.

Yet Lemonade still has plenty of ways to expand its business. It can eventually provide auto, travel, and even health insurance while expanding beyond its four core markets (the United States, Germany, France, and the Netherlands). Those expansion plans could be costly, but the company could still gain millions of new users over the long term.

That explosive growth potential, along with Lemonade's low enterprise value of $5.3 billion, makes it a lucrative takeover target for larger insurance companies, as well as growing fintech companies.