Lemonade (LMND 4.14%) and Zillow (Z 7.56%) both disrupted aging industries with their digital platforms. Lemonade's AI-powered app makes it easier to sign up for homeowners, renters, pet, and term life insurance. Zillow simplified the process of listing and searching for properties to buy and rent.
Both companies attracted a lot of investors. Lemonade, which was founded just six years ago, went public at $29 per share last July, opened at $50, and now trades in the high $80s. Zillow was founded 15 years ago and went public at $20 per share in 2011. Its stock more than doubled on the first trading day and is now worth more than $100 per share. Let's take a closer look at these two innovative companies and see if either stock is worth buying right now.
How fast is Lemonade growing?
Lemonade's app insures users within 90 seconds and processes claims within three minutes. It originally only offered homeowners and renters insurance, but subsequently launched pet and term life insurance plans. It also intends to launch auto insurance plans later this year.
Lemonade's simple approach makes it popular with younger customers. Approximately 70% of Lemonade's customers are under the age of 35, and many of them are first-time insurance buyers.
Lemonade's revenue rose 40% to $94.4 million in 2020. Its total number of customers grew 56% to just over one million, while its in force premium and premium per customer rose 87% and 82%, respectively. Its gross loss ratio decreased from 79% to 71%, but its net loss still widened from $108.5 million to $122.3 million.
In the first quarter of 2021, Lemonade's revenue fell 10% year over year to $23.5 million, and its net loss widened from $36.5 million to $49.0 million. It attributed that slowdown to the winter storm in Texas, which boosted its gross loss ratio to 121%. But its customer base still grew 50% year over year to nearly 1.1 million -- as its in force premium and premium per customer rose 89% and 25%, respectively. It also retained 81% of its customers over the past 12 months -- compared to 70% a year ago.
Lemonade's slowdown should be temporary, since it still expects 24%-28% revenue growth for the full year. But it also expects its adjusted EBITDA loss to widen year over year -- which suggests its gross loss ratio and expenses will remain elevated as it expands its platform into new insurance markets.
How fast is Zillow growing?
Zillow is the most visited online real estate website in the U.S. In addition to connecting buyers and renters to real estate agents, it provides financing and online rental payment services.
It's free for individuals to list properties to sell and rent on the platform, and it's free for users to search thorough those listings. Zillow generates most of its revenue by selling listings on its Zillow Rental Network to property management companies, selling display ads to local real estate agents, providing Premier Agent websites, fixing up and reselling properties, and offering mortgage services.
Zillow's revenue rose 22% to $3.34 billion in 2020. It reported a record 9.6 billion visits to its website throughout the year, up 19% from 2019. That growth indicates the pandemic didn't significantly throttle the market's demand for new homes.
Zillow remained unprofitable on a GAAP basis, but its net loss narrowed year over year, from $305.4 million to $162.1 million. Its adjusted EBITDA surged 782% year over year to $343 million.
Zillow's revenue rose 8% year over year to $1.13 billion in the first quarter of 2021, and its total visits rose another 19% to 2.5 billion. It also generated a GAAP profit of $52 million, compared to a loss of $163.3 million a year ago, and its adjusted EBITDA jumped from $5.1 million to $181 million.
Zillow hasn't offered any full-year guidance yet, but analysts expect its revenue and adjusted earnings to surge a respective 66% and 136% this year, as the housing market heats up even more after the pandemic passes.
The valuations and verdict
Lemonade's platform is disruptive, but it faces a growing number of tech-forward challengers and its stock is expensive. Its year-over-year revenue growth is slightly skewed by a change to its reinsurance structure last year, but its stock still looks very frothy at 45 times this year's sales.
Zillow trades at 74 times forward earnings and five times this year's sales. Those valuations aren't cheap either, but the stock is more reasonably valued than Lemonade. Furthermore, Zillow has already established itself as the market leader in online real estate listings -- while Lemonade still needs to prove it can gain tens of millions of new users to justify its current valuation.
I personally own a small position in Lemonade as a speculative play, but I wouldn't recommend investors choose the insurtech stock over Zillow. Zillow remains the better overall investment because its business is on firmer ground, it's growing faster, and its stock is much cheaper.