What happened
Shares of Lemonade (LMND 0.42%) declined 4.5% today as of market close, far more than the broader market indices dropped on the day. The S&P 500 fell just 0.15%, and the NASDAQ composite was down 0.56%. Lemonade stock is now down nearly 10% in the last week and has lost 64% of its value in 2021 with just days left to go until the new year.
Image source: Getty Images.
So what
Lemonade has been a divisive stock, especially since surging in value at the start of 2021 only to quickly collapse. Negative sentiment surrounding the company isn't improving heading into 2022. On one hand, this is a fast-growing insurance upstart. The company's in-force premiums increased 84% year over year in 2021's third quarter to nearly $347 million, driven by a 45% increase in customer count (over 1.36 million insured) and a 26% increase in premium per customer (to $254 on an annualized basis).
However, aggressive expansion is coming at a cost. Lemonade's loss ratios on insurance policies grew to 77% in Q3 compared to 72% a year ago even as management explained newer products (like home and pet insurance) are improving. As a result, adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) losses were $51.3 million in Q3 as the company expands its portfolio and aggressively markets to acquire new customers.
Now what
Besides continued growth but also losses in Q3, many investors are still divided over Lemonade's pending takeover of fellow would-be insurance industry disruptor Metromile (MILE +0.00%). Since it went public by way of a special-purpose acquisition company (SPAC) back in February 2021, the stock has lost some 88% of its value. The pay-per-mile car insurance outfit has stalled out, reporting essentially no growth during its Q3 2021 financial update compared to Q2 2021.
Metromile shareholders will receive Lemonade stock valued at $500 million at the time it was announced, not including the $159 million in cash and short-term investments Metromile had at the end of September. While this won't impact Lemonade much, combining two loss-generating businesses could help unlock greater efficiency (Lemonade itself is trying to jump-start its brand new Lemonade Car product) or drain away shareholder equity at an even faster rate than before.
Only time will tell. But for those eyeing an entry point in Lemonade stock, bear in mind timing a purchase can be a fool's errand. Lemonade and Metromile are unique start-up-style businesses, ones that rarely go public this early on in their journey. View this as a very high-risk, potentially high-reward investment. Keep any purchase (if any) very small at this early stage in Lemonade's story.
