Lemonade's (NYSE:LMND) stock recently dropped to a six-month low after the insurance technology company posted its first-quarter earnings. Its revenue declined 10% year-over-year to $23.5 million, but still beat expectations by $1.6 million.

But its net loss widened from $36.5 million to $49.0 million, or $0.81 per share, which missed estimates by three cents. On an adjusted EBITDA basis, its net loss widened from $22.4 million to $41.3 million. 

A woman sips lemonade as she checks her smartphone.

Image source: Getty Images.

Those numbers were mixed, but Lemonade raised its full-year revenue guidance. It previously predicted its revenue would rise 21%-24% in 2021, but it now expects 24%-28% growth. It maintained its prior adjusted EBITDA forecast for a loss of $163-$173 million, compared to a loss of $97.9 million in 2020.

Lemonade's numbers weren't terrible, but they also weren't good enough to save it from the ongoing sell-off in tech stocks amid rising bond yields, a focus on reopening plays, and inflation fears.

But is Lemonade worth buying at these prices for long-term investors who intend to hold the stock for several years? Let's review the four key things to consider if you want to buy Lemonade's stock.

1. Look beyond the revenue

Lemonade's revenue isn't the best gauge of its growth right now, since a change to its reinsurance structure in the second half of 2020 is throttling its year-over-year comparisons.

Instead, we should keep an eye on its total number of customers, its in-force premium (the annualized premium of its total customers), its premium per customer, its gross earned premium (the earned portion of its gross written premium), and its gross loss ratio.

Ideally, its gross loss ratio should decline as all of its other metrics rise. That's what happened last year:

Metric

FY 2019

FY 2020

Change (YOY)

Customers

643,118

1,000,802

56%

In Force Premium

$113.8 million

$213 million

87%

Premium per Customer

$117

$213

82%

Gross Earned Premium

$75.5 million

$158.7 million

110%

Gross Loss Ratio

79%

71%

(10%)

Data source: Lemonade. YOY = Year-over-year.

Lemonade continued to expand in the first quarter, but its gross loss ratio hit the triple digits as it was swamped by claims from the February winter storm across Texas and several other states.

Metric

Q1 2020

Q1 2021

Change (YOY)

Customers

729,325

1,096,618

50%

In Force Premium

$133.3 million

$251.7 million

89%

Premium per Customer

$183

$229

25%

Gross Earned Premium

$30.5 million

$56.2 million

84%

Gross Loss Ratio

72%

121%

68%

Data source: Lemonade.

However, Lemonade's adjusted EBITDA guidance indicates that the spike will be temporary. For the full year, it expects its in-force premium to rise 77%-79% and for its gross earned premium to increase 76%-78%.

Furthermore, Lemonade's full-year guidance only factors in the costs for its upcoming car insurance service without any top-line benefits. It hasn't announced a launch date for the new service yet, but an early arrival could help Lemonade beat its own revenue expectations.

2. Focus on its disruptive potential

Lemonade streamlines the byzantine and time-consuming process of purchasing insurance with a single AI-powered app. It uses algorithms and chatbots to insure users within 90 seconds and process claims within three minutes.

About 70% of Lemonade's customers are under the age of 35. It already offers home, renters, life, and pet insurance policies, and the bulls believe it could potentially disrupt the auto, travel, and health insurance markets. It could also gain even more users as it expands beyond the United States.

3. But don't ignore the headwinds

However, the bears will point out that Lemonade's stock is still very expensive at over 30 times this year's sales. Many other traditional insurance stocks -- including Allstate (NYSE:ALL) and The Travelers Companies (NYSE:TRV) -- only trade at about one times this year's sales.

Lemonade is also burning cash, it won't generate a profit anytime soon, and it diluted its shares with a big secondary offering earlier this year. Its stock-based compensation expenses also consumed more than a quarter of its revenue in the first quarter.

The rest of 2021 could be challenging for Lemonade as it tries to reduce its gross loss ratio and launch its auto insurance service while offering competitive rates. Lemonade's platform is disruptive, but it doesn't have much room to raise its prices in the saturated insurance market.

4. Short-term investors need not apply

I own a small position in Lemonade because I've noticed its striking similarities to companies like Zillow (NASDAQ:Z), Expedia (NASDAQ:EXPE), and Square (NYSE:SQ) -- which all disrupted legacy markets and generated multibagger returns.

I expect Lemonade's stock to remain volatile this year, and I wouldn't be surprised if the company fails to achieve its ambitious goals. That said, I still think Lemonade is a good speculative play for investors who can afford to hold the stock for several years -- but it's a very risky investment for short-term investors.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.