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Here's Why I'm Going to Double Down on Lemonade

By Matthew Frankel, CFP® – Nov 19, 2021 at 6:22AM

Key Points

  • Lemonade looks expensive, but that could quickly change as it pushes into the more expensive auto insurance market.
  • Lemonade's pending Metromile acquisition is a brilliant move that the market is overlooking.
  • Auto insurance could help Lemonade multiply its sales several times over.

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The insurance technology company is making serious progress, and the market is overlooking it.

To say insurance technology company Lemonade (LMND 1.88%) has been a highly valued stock would be an understatement. The stock is down by more than 55% so far in 2021, but still trades at more than 37 times trailing-12-month revenue.

There's a good reason for this lofty valuation, however. Most of Lemonade's revenue comes from low-cost types of insurance, particularly renters insurance. If Lemonade can take its 1.1 million customers -- most of which are very satisfied with their experience -- and sell them more expensive types of insurance, there could be tremendous upside ahead.

Well, investors recently got some excellent news on this front, and it's enough to make me confident in adding to my already considerable position in the insurance disruptor.

A glass of lemonade.

Image source: Getty Images.

Lemonade Car has officially launched

We've known Lemonade has been developing an auto insurance platform for some time now, but there has been a major question mark about launch timing. And the company has been extremely vague. In Lemonade's second-quarter earnings report, the company said:

"Notwithstanding our good progress on the development of Lemonade Car, given our dependency on regulatory approvals -- the timing of which is hard to tie down -- we are not at this stage announcing a concrete launch date, nor are we including anticipated IFP associated with Lemonade Car in our guidance for FY 21."

We now have some much-needed clarity. A couple weeks ago, Lemonade announced the official launch of Lemonade Car in Illinois, with Tennessee not far behind and a nationwide rollout planned for the not-too-distant future. The product is designed to use Lemonade's technology to provide an unmatched purchase, claim, and payment process, and is also designed to offer preferential pricing to safe drivers, low-mileage drivers, and owners of EVs and hybrid cars.

Smartly, Lemonade will also offer discounts to its existing customer base if they buy Lemonade Car insurance in addition to the company's other insurance products.

A bargain acquisition could accelerate the rollout

About a week after officially launching Lemonade Car, the company surprised investors and announced that it had agreed to acquire auto insurance data science company Metromile (MILE) in an all-stock deal.

To be fair, Metromile hasn't been a great investment for its shareholders. But it could be a brilliant acquisition for Lemonade. Metromile has been accumulating data for its car insurance business for years, with billions of miles of valuable data, claims data, and precise loss prediction algorithms. Not only that, Metromile has 49 state insurance licenses and already has more than $100 million of in-force premium, which could jump-start Lemonade's national rollout.

Here's the best part. Metromile shareholders will receive Lemonade shares at a ratio of 1 for every 19 Metromile shares they own. At the time the deal was announced, this valued Metromile (which has more than $250 million in cash on its balance sheet) at about $500 million. However, Lemonade stock has fallen considerably since the deal was announced, and at the current share price, Lemonade's acquisition price is about $365 million, so it is effectively getting Metromile's business for just over $100 million and adding some more growth capital to its already strong and debt-free balance sheet. In short, based on the current price, Lemonade is getting a steal.

Why Lemonade Car could be a game changer

You might be wondering why I'm so excited about Lemonade Car in particular. To put it mildly, it could be an absolute game changer for the company.

The majority of Lemonade's business today is renters' insurance, which is a rather small market. The average renters' insurance policy is about $15 per month, and the entire market is about $4 billion in size. In contrast, the average auto insurance policy is about 10 times this amount, and auto insurance is a nearly $300 billion market. Unlike renters' insurance, auto insurance is a type of policy that every driver needs.

Lemonade estimates that its existing customers spend over $1 billion on auto insurance annually, and these are customers who are generally very satisfied with their experience with Lemonade. If the company can get a substantial portion of its current 1.1 million customers to sign up for auto insurance and can successfully take share from legacy auto insurers, Lemonade Car could be the catalyst that takes the business to the next level.

Matthew Frankel, CFP® owns shares of Lemonade, Inc. The Motley Fool owns shares of and recommends Lemonade, Inc. The Motley Fool has a disclosure policy.

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