Are Bill.com and Lemonade Good Buys Now?

In this week's episode of Industry Focus: Financials, Fool.com contributor Matt Frankel, CFP® and host Jason Moser take a closer look at two stocks they bought last August, Lemonade (LMND 0.83%) and Bill.com (BILL -2.26%). Matt and Jason dig into the stock performance of each one, how the businesses are doing, and more, to determine whether these stocks are still worth buying today. 

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This video was recorded on Nov. 22, 2021.

Jason Moser: It's Monday, November 22nd. I'm your host, Jason Moser and on today's Financial Show, I think today's Financial Show needs to be sponsored by Huey Lewis and the News because we're going back in time. Joining me for this little trip it's my partner in crime Certified Financial Planner and I know he gets the Huey Lewis and the News joke, it's Mr. Matt Frankel. Matt, what's going on?

Matt Frankel: Great, I'm glad I didn't miss you this week. It seems every time there's a holiday, it's on a Monday, and this week's holiday it's not a Monday, so I actually get that yet with you this week on the show.

Jason Moser: That's right. I always enjoy Mondays. It's financial Mondays. We could talk about what's been going on in the world of fintech and insurance and banks and all that good stuff. Matt, we've gotten out of earnings season and we certainly had a lot to talk about there. We thought this week would be a perfect opportunity to dig into a show we taped back in 2020 on August 31st, 2020. Listeners, you may have heard on the show, Matt and I had a couple of stocks we were ready to buy. Matt, you called out Lemonade and I pointed to Bill.com. Now it's been a little while. That was August 31st, 2020. Fast-forward to today it's been closing in on a year-and-a-half. We figured it was as good a time as I need to revisit these ideas and see how the companies are doing, not just from a stock price perspective because of course, we don't judge our investments on such a short timeline but looking beyond the stock price, looking at the business, the fundamentals of these businesses and seeing how they're performing. 

Matt, I want to go ahead and start with Lemonade, want to go ahead and let you kick this off for us. Either Lemonade it's been a little bit of a bumpy ride. It's had a volatile ride. At one point it was up really big for you. I think better than something like 200% early on but it's come back down to earth. As the market close on Friday, shares are down about 10% from the date of the show by my calculations. Again, not thinking as much into the stock performance as we are into the business itself but how's the business of Lemonade doing?

Matt Frankel: Yeah, the bumpy ride is a generous way to describe the stock's performance I guess I would say. If you're curious the S&P is up 35% since that show so underperform the S&P by 45 percentage points. But like you said, the stock price, especially on shorter time intervals is not really what we're going for. Having said that, I wish it would have stayed at about $185 level or wherever it topped out at back in January I believe it was.

Jason Moser: But there was a lot of enthusiasm at the time. Remind our listeners again what does Lemonade do and why do you think that enthusiasm exists.

Matt Frankel: Lemonade is an insurance tech company. The business premise makes a lot of sense. The insurance buying process is historically terrible for lack of a better term. Their claims processes is bulky. I don't know if you've ever filed an insurance claim on your auto insurance or your homeowners' insurance.

Jason Moser: Oh, I have. [laughs]

Matt Frankel: It is not a fun process.

Jason Moser: No, it's not.

Matt Frankel: Lemonade's philosophy is there has to be a better way. They make you see you can get an insurance quote instantly. You could buy a policy pretty much instantly online. At a competitive price, you can submit a claim, they'd process some claims in seconds. It's a really quick process. They've done a great job of disrupting a few insurance markets, particularly renter's insurance, that's been their bread and butter today. They also rolled out homeowners insurance, which the idea being that renters will eventually buy houses, you don't want to lose that customer, you want to give away to trade up.

Jason Moser: Yeah.

Matt Frankel: Between renters and homeowners, that makes up 83% of Lemonade's business right now.

Jason Moser: Oh wow.

Matt Frankel: They're primarily renters and homeowners for the time being. Pet insurance is another 15%. Life insurance makes up the other two percent right now and that's what Lemonade does. With renter's insurance, they've been very successful. It's a type of insurance that's cheap, number one, and it's the type of insurance that most millennials wouldn't buy if there wasn't a good option. They've done a great job of building their customer base up. They hit a million customers in just over four years. It took companies like State Farm and all these other legacy players more than 20 years to get to a million customer milestone. They currently have 1.36 million customers. That's up 45% in the past year alone.

Jason Moser: Wow.

Matt Frankel: Really, very successful in terms of building up that part of their business. The question is, number one, can you make money at it? Because right now their loss ratios are a little higher than they need to be to become profitable. Just their loss ratio meeting the percentage of the premiums they take and that they're using to pay claims was 77% in the most recent quarter. They needed under 75% at an absolute maximum to be profitable. Can this insurance model translate to more expensive and complex types of insurance? Renter's insurance is not only cheap, it's relatively easy to underwrite. When you talk about things like auto insurance, which is their newest vertical, which we can talk about in a second, the average auto insurance premium is 10 times the average renters insurance premium, but it's a more complex type of insurance.

Jason Moser: Yeah.

Matt Frankel: That's really the question. Lemonade just hit a fresh 52-week low today, which isn't ideal for anybody who invested in it like me. But that just gives it a bigger growth potential, I guess [laughs] going forward.

Jason Moser: It's a better value. We get asked the question, is it a value play or value trap? I think I know how you're going to answer this.

Matt Frankel: Sure.

Jason Moser: Now we tend to agree. I don't think this is a business that's fundamentally flawed or challenged, a lot of times that's what a value trap ultimately is, is you can't really find that road to recovery so to speak. It really does look like Lemonade given how young of a businesses it is and how it's trying to disrupt a very traditional and a difficult to disrupt market. Fintech has been a big opportunity in a lot of ways and it feels like Lemonade right there. But let's definitely dig into that auto insurance side of it because, I've had experience interestingly enough on both sides of this. Of course as a consumer, we have auto insurance and you have to obviously have that. I've also worked on the auto insurance side of the business. I used to work at Travelers Insurance before I actually came up here at the Fool. I was in their auto insurance department for a year getting ready to jump into their underwriting program before I actually got this job. I can tell you, auto insurance, it's brutal business to work in, it's really hard. The one thing that opened my eyes was just how many claims come in on that side of the business. There are just so many car wrecks. [laughs] I was just floored. There is this, I'm sure, plenty of room for fraud and opportunity to scam, but generally speaking, it feels like auto insurance, it's a pretty high volume business and if Lemonade's trying to make it better, hey, listen I respect that.

Matt Frankel: Auto insurance is a massive market to go after, which is why everyone at Lemonade is so excited about it anyway. The renters insurance market collectively, Americans spend about 4 billion dollars a year on renter's insurance. In auto insurance, it's 288 billion.

Jason Moser: Holy cow.

Matt Frankel: [laughs] It's not even comparable when it comes to market size. Lemonade estimates that its current customers spend over a billion dollars a year in auto insurance premiums. Lemonade's total in-force premium is $347 million. Their current customers spend about triple the amount on auto insurance that Lemonade is bringing in all together, and that's just with its existing customers. Big opportunity. They have just recently announced they are acquiring Metromile. I don't know if you saw that.

Jason Moser: I did, yeah. I remember you mentioned that.

Matt Frankel: You think Lemonade's stock did poorly, Metromile's stock has really done poorly since it went public. That was the SPAC. It was one of the ones that Chamath Palihapitiya led the PIPE round on. Your premium is based on how much you drive, so it's an interesting business model. Lemonade's acquiring them in an all stock deal, and I can't emphasize this enough, they are getting a steal. Here's why. Lemonade's giving one share of its stock for every 19 Metromile shares investors own. It's like a two or three dollar stock. At the time the transaction was announced, it valued Metromile at about $500 million. Lemonade's stock plunged after earnings because apparently investors don't like the steal, they didn't like the loss ratios, they didn't like a few things in their earnings report. Now Lemonade is effectively paying $340 million for this because it's an all-stock deal and its stock is cheaper. Metromile has more than $250 million in cash on its balance sheet. Lemonade's getting this business for almost nothing. Well under $100 million is what they are effectively paying for the business.

Jason Moser: Now given Metromile's performance to date and obviously businesses had some challenges, but you still like the fundamentals of that business being a part of Lemonade's family?

Matt Frankel: Well here's why, Lemonade is paying about $80 million essentially for Metromile's business; $80 million, in the context of what we're talking about is like nothing. Lemonade has auto insurance licenses in one state so far, Illinois. They are about the roll out Tennessee and then they were gradually going to roll out nationwide. Metromile already has 49 state auto insurance licenses. That really accelerates the rollout a little bit.

Jason Moser: Yeah it does.

Matt Frankel: Metromile already has $100 million of in-force auto insurance premium. Metromile also has data from over billions of miles of customer driving activity, over 400 million customer trips that they've been tracking data on. When you're talking about Lemonade, which is a data driven AI platform, all that data is worth its weight and gold. They're getting an absolute steal on Metromile. If you believe like I do the auto insurance is the story with Lemonade and the reasons to pay what you're paying for it, I can't emphasize enough how much I like the Metromile feel.

Jason Moser: Well, then circling back to the ultimate takeaway here for us, for our listeners, knowing what you know today in regard to this business, would you buy the stock today?

Matt Frankel: Over the weekend, I published an article called, "Here's Why I'm About to Double-Down on Lemonade," so that should give you your answer. As soon as I can stop talking about it, right now I just reset the clock because we're talking about it now, but as soon as I'm allowed to I'm going to buy some more shares of it.

Jason Moser: [laughs] Well, there you have it. Matt sees Lemonade as a value play, not a value trap. I tend to agree. I think insurance, the market opportunity is massive and the nature of the business and such. It's a pretty reliable market because you have to have it even though you probably really don't want to deal with it. Like we said, we don't judge these companies based on such a short timeline. It seems like the stock price may be witnessing some challenges there, but it sure does look like they're doing a lot of good things with the business, so we'll continue to follow and keep up with it.

We'll pivot here to Bill.com for a few minutes. Now Bill, this is a tale of two stocks; you've got Lemonade with its challenges, Bill.com on the other hand, has done quite well. I mean, this is not a competition. Exactly. To be very clear, we're not looking at this through the competitive lens as much as we're just looking at the fundamentals of these businesses and revisiting them, but it's been a nice stretch, no doubt.[laughs] As a shareholder, I'm not complaining whatsoever. Remember, Bill.com is a cloud-based software business. 

They digitizes and automates back-office financial operations, mostly for small and mid-sized businesses around the world. Shares are up better than 220, so around 220% since the show, and I think a lot of that has to do ultimately, if we talk about insurance being such a massive market opportunity. Obviously, fintech has offered all sorts of different ways to disrupt and make the system better. Bill.com, they say their vision is to be the all-in-one financial operations platform for small and medium-sized businesses. It's not a small vision, it's obviously a very large vision they have, and I think they've made some acquisitions here along the way that are in line with that vision. They recently acquired Invoice2go, they also had the acquisition of Divvy as they continue to incorporate more services and products into their SaaS business. That's what they do, they run that SaaS business model where customers pay that monthly subscription fee. 

They also benefit from the transactions that go through that platform. So you see some network effects that build up here over time as they bring more businesses into the fold there and more customers accept those payments. That just gets easier and easier over time. Convenience obviously is a big selling point in this line of work. Kind of like Lemonade, Bill.com, special sauce, they see it as their AI, their artificial intelligence-driven platform. Ultimately that is something that makes their network smarter, speedier, more reliable, reduces fraud. Over time, ideally, you want to see those network effects continue to build that can result in some good switching costs, which can result in potentially some pricing power down the line there as well. But all in all, it really does feel like the business fundamentally continues to perform very well. I don't know that I would look at this as a value play though, Matt.

Matt Frankel: That's fair enough. I just looked this up as you were talking. At the time that we made these additional calls, Bill's market cap was roughly double what Lemonade's was. Today, Bill.com's market cap is roughly 10 times what Lemonade's market cap is.

Jason Moser: Yeah. It's up there, man. I will tell you. I understand the enthusiasm, but when we were talking about these last year in what I was talking about what to watch, I mean, at the time, shares were trading, shares were valued at around 48 times sales. Now, it's a new business still working toward that profitability. But I think the reliable nature of the business model means the market is going to give them a little wiggle room to get there. But at that time I said that's really one of the bigger risks here, beyond just whether they can execute or not as you're paying a lot even in this environment where 30 times sales, essentially it's like the new P/E, 48 times sales stretch. Now, if we look toward today, recently, they just set expectations for this coming year and they're calling for revenue in the range of $538 million-$541 million. If you look at where the businesses today, the revenue they are calling for fiscal 2022, now you've got this stock value more around 60 times full-year expectations. It hasn't gotten any cheaper but maybe this is a case of one of it looks like it's poised to keep on winning.

Matt Frankel: The margins are fantastic. I'll give it that. One thing I think issue with Bill is when they quote their market opportunity, I have to wonder just how exaggerated it is through the year. In the U.S. 6 million small and medium-sized businesses, 26 billion sole proprietors, $25 trillion of business-to-business payment volume, technically all of that's correct. But think of it this way. I'm a sole proprietor technically, I would have no use for Bill's products.

Jason Moser: Right.

Matt Frankel: Every Uber driver, every DoorDash driver, every Instacart shopper, they're all sole proprietors and they would use these products.

Jason Moser: Yeah.

Matt Frankel: It's really tough to quantify. My point is there's a huge market opportunity here for sure. It's really tough to quantify how big it is.

Jason Moser: I think that's a fair point. I think a lot of times it's worth remembering too for listeners. There's difference between that total addressable market, that TAM and the serviceable addressable market, the SAM. There are two very different things and I understand businesses like to quote that TAM because it's typically the bigger number but you got to do a little bit of homework to really get to the crux of what the SAM is because that's really what matters. Then for a business like Bill.com, I would agree. I think it's even more crucial.

Matt Frankel: Out of those 26 million sole proprietors, how many would actually have reason to use Bill.com's platform? I don't know the answer, maybe a lot. But the point is that I don't know.

Jason Moser: Well, I think it's probably reasonable to look at that with a little bit of, take it with a grain of salt. That's where you go in there. You start discounting some of those forecasts, some of those expectations in order to paint a picture that maybe accounts for a more realistic picture.

Matt Frankel: I'm not trying to talk negative just because this was your stock. [laughs] If you look at some of these numbers, you know why it's done so well. The margins look fantastic, 83% gross margin. Lemonade, does it have an 83% gross margin, 124% revenue retention. That means its average customer that's been with the business for over a year is spending 24% more than it was a year ago. They're obviously finding a ton of value in the product, 126,000 customers, that's a big customer base and keeps growing. Revenue was up 150% year over year, which is a bad comparison because of COVID. But a lot of people thought that the revenue was going to suffer long term because of COVID. Because generally they are focused on businesses with like a brick-and-mortar presence. The business has performed phenomenally well, especially in comparison to where people thought it would be during the height of the COVID pandemic, like in August when we made the calls.

Jason Moser: I think that really has been a beneficiary of the move toward the digital economy. I mean, that really I think it's one of those businesses that has certainly benefited from that. There's been a lot of tailwinds. You mentioned that revenue growth, more impressively to me, even is the organic core revenue growth grew 78%, so they've made some acquisitions along the way and that's something to keep in mind too. Businesses that make these acquisitions, those acquisitions come with risks and you've got to make sure they can incorporate those into the business seamlessly. But generally speaking, it does feel like it's benefited from a lot of tailwinds. I'm surprised we haven't seen maybe some profit taking, some selling as we've seen with some of these other businesses that benefited so much over the last year and a half. As we've moved more digital. But maybe that just really speaks to the progress the businesses making. I think regardless, very competitive space, I mean, you've got companies like Square out there that help all sorts of physical businesses. 

Companies like Coupa Software generally focused on the same market. It's good to see Bill.com continuing to prosper there. They're reasonably inked a neat relationship with Marqeta, which is an issuer for card issuing for the modern day. That's a positive as well, but it's not a stock that's gotten any cheaper and as to would I buy this stock today, personally, honestly, I do feel like this is one of those I would like to add too. I would feel comfortable adding to my position today because when I first bought these shares, I approached it with the idea that I'm going to start with a small position to see where this goes and if it's a business that continues to succeed, I would be more than happy to add to this winner. I think that's the stance I take today is yeah, I would feel very comfortable adding to this position. If you don't own these shares and you want to own them, I think it's a reasonable idea. Again, I wouldn't put everything in it at once. I think this is a company that you buy in thirds or fourths or fifths. However much capital you decide you want to put into a business like this, split those purchases up. There's no reason to buy it all at once, but the business is performing very well nonetheless. I don't know Matt, I'm still very optimistic about Lemonade. I think there's a bunch of opportunity in front of the business as well. I hope to keep hanging on to those shares and it sounds like you will as you're getting ready to double down on that position.

Matt Frankel: As soon as I can stop talking about it for a day or two.

Jason Moser: Well, we'll shut up about it. [laughs] We'll leave it off the show here for the next couple of weeks and you can get to it. But I think that's going to do it for us this week, Matt, I appreciate you taking the time to dig into Lemonade and joining you for this little trip back in time.

Matt Frankel: Of course, always fun to be here.

Jason Moser: Remember folks, you can always reach out to us on Twitter @MFIndustryFocus or you can drop us an email at [email protected]. As always, people on the program may have interest in the stocks they talk about at The Motley Fool, may have formal recommendations for or against. Don't buy or sell stocks based solely on what you hear. Thanks as always to Tim Sparks for putting the show together for us. For Matt Frankel, I'm Jason Moser, thanks for listening and we'll see you next week.