What's the Deal With Lemonade's Acquisition of Metromile?

When Lemonade (LMND 3.16%) announced in November that it would be acquiring Metromile (MILE), investors' response to the deal was decidedly mixed. Like many growth stocks in recent months, shares of Lemonade have fallen considerably from their all-time high. Currently, the stock is trading down by nearly 80% from one year ago.

What should investors think of this deal? In this segment of Backstage Pass, recorded on Dec. 17, Fool.com contributors Toby Bordelon, Jason Hall, and Lou Whiteman discuss.

Toby Bordelon: The last one talking about is Lemonade, Metromile. Brian Withers can do this today, Brian Withers loves this deal, you could get buy him a beer probably, and he'll talk for like hours on his thoughts on this.

Lemonade is this newfangled AI-driven insurance company, that's a Fool rec in several services, and you've probably heard a lot about. They are big into renter's insurance, homeowners insurance, pet insurance, I don't want to say they are big into that, I mean, they are, but it's that it's just a much smaller market.

Announced they were getting into car insurance, they're getting into auto insurance, that announcement earlier this year, that was a big deal, that's the huge market. What they ended up doing is, suddenly they bought Metromile, Metromile is a similar company, smaller doing auto insurance.

You can see here from their presentation, they talk about Metromile having a 10-year head start at AI, and big data for car insurance, which is what Lemonade has done for renters, and homeowners insurance, and look at these highlights, bypassing the riskiest phase of the growth trajectory, and leapfrogging to the leadership position.

Basically, management has said, you know what, let's not build this ourselves, let's go buy it, and they went, they bought Metromile to make this happen, and I love this, they complete us.

Metromile gives Lemonade what they don't have, which is auto insurance, this is a great little slide here, that's what they did. You can get in the details, we don't really have time for that, but it's simple. Lemonade is saying, we need to do this fast, and here's a way to do it, let's do it.

If you think that car insurance is going to be good for Lemonade, if you think that's a market they can really do well in, I think you probably like this deal because it gets them where they need to be faster.

It's all about speed, it's about gaining market share quickly, and as opposed to a slow rollout, which maybe there were some risks there, maybe it wasn't going quite where they wanted it to go, they opted just like, hey, lets buy Metromile, let's just get this done now.

Lou Whiteman: Just to emphasize a point too, they bought Metromile for what, one-fifth of what the company was valued at just a couple of months before. Metromile had failed to gain traction, we talked a lot about valuations, and the risk of overpaying.

Lemonade, if they only get the faster to market because Metromile's state certifications, if that's all they get out of that, they end up having to flush to technology, which I don't think they will, it was still worth the money just to get there first. This was a great deal, this was probably the deal of the year, I believe.

Jason Hall: Took the words out of my mouth, just the insurance licenses alone, just the ability to operate in all those states alone was worth what they paid.

Lou Whiteman: For what they have under the couch after the IPO.

Jason Hall: Yeah, entirely. I also want to say that strategically, as a business, these are the kind of acquisitions that you'd love to see, that you should love to see as an investor, because you're not buying, you have to pay, you're not [laughs] spending a ton of money for a feature, you're transforming, and accelerating your biggest growth initiatives for cheap money.

Toby Bordelon: Yeah, I think it's going to work out well for them. That's a great deal.