Insurance technology company Lemonade (LMND 3.41%) is about 75% off its highs, but it still trades for a rather high multiple of its revenue -- or so it seems. In this Fool Live clip, recorded on Nov. 29, Lemonade's co-founder and co-CEO Daniel Schreiber discusses in an interview with Fool.com contributor Matt Frankel why there is more to Lemonade's valuation metrics than it may seem.
Matt Frankel: But do you think the market has a difficult time valuing your company? A lot of insurers trade for one times sales or something to that effect. I think even after recent performance, you trade for something like 30 times your sales. You think the market struggles with where to value you?
Daniel Schreiber: Well, one area of struggle or confusion is actually embedded in your question as well, which is, what exactly are you multiplying by? Usually you're right, insurers will trade up one time or two times or something in between of their book, which is the total premiums.
For most insurers, total premiums and revenue are synonyms. It's the same thing. For Lemonade, it isn't. The reason it isn't is just because of GAAP accounting practices that don't allow you to recognize premium that is reinsured through our proportional reinsurance treaty, you don't recognize that as revenue. Even though it is part of your premium, if you choose to reinsure it in a particular way, GAAP accounting practices mean that you don't count that as revenue. We do that to 70% of our book, and what that means is that 70% of our premiums are not recognized as revenue. If you actually look at our top line, which is in-force premium, which allows you to disregard what kind of reinsurance we have in place, we are at less than 10 times that. we're something like nine times or eight times depending on the day and the share price. It is still a healthy premium, but it's not 30x, it's 8 or 9x total book rather than 30x, and that revenue thing can be very misleading.
I think why we're getting 8, 9, 10x a book, it's really because nobody who's investing in Lemonade today is investing because of what we have, they're investing of what we might become. I think this is very much a long-term strategy. I know that's certainly the way you at Motley Fool talk about our stock, is five-, 10-year horizons. If you believe that insurance is a market that is ripe for disruption that insurers that will thrive in the 21st century are those that are created in the 21st century, that Lemonade can 10x from where we are and then 10x again and still be a medium-sized insurance company, and that we will end up at that point with lower costs, superior products, superior underwriting, then you can start seeing why actually paying those multiples today can make a lot of sense in the long term, it may be a smart thing to do. You really can't compare us to companies that have zero growth when we're growing at close to 100% year-on-year and say apples to apples. Clearly those are the drivers of our investor base and we welcome that.
