Lemonade's (LMND +0.55%) stock price plunged 19% during after-hours trading on Feb. 23 following the online insurer's fourth-quarter earnings report.
Its revenue doubled year over year to $41 million, beating analysts' estimates by $1.6 million. However, its net loss more than doubled from $33.9 million to $70.3 million, or $1.14 per share, and missed estimates by a penny.
Those headline numbers don't look disastrous, but a deeper dive into Lemonade's report reveals five bright red flags for its future.
Image source: Getty Images.
1. Its growth is decelerating
Lemonade bundles together renters, homeowners, term life, pet health, and auto insurance plans in a single artificial intelligence (AI)-powered app. It claims its platform can insure users within 90 seconds and process claims in just three minutes.
NYSE: LMND
Key Data Points
Lemonade's simplified approach made it a popular choice for younger and first-time insurance buyers. When it went public in mid-2020, it claimed that approximately 70% of its customers were under the age of 35. The bulls claimed that foothold would enable Lemonade to disrupt traditional insurers.
But for that disruption to occur, Lemonade would need to gain tens of millions of new customers over the long term. That's not happening yet -- its total number of customers rose 43% year over year to 1.43 million in Q4, but that only represented 5% growth from the previous quarter.
In addition, Lemonade's year-over-year growth in customers, premium per customer, in force premium (IFP), and gross earned premium (GEP) have all been decelerating over the past year, even as it continuously rolled out new products to boost its average premiums per customer.
|
Growth (YOY) |
FY 2020 |
Q1 2021 |
Q2 2021 |
Q3 2021 |
Q4 2021 |
|---|---|---|---|---|---|
|
Customers |
56% |
50% |
48% |
45% |
43% |
|
Premium per Customer |
82% |
25% |
29% |
26% |
25% |
|
IFP |
87% |
89% |
91% |
84% |
78% |
|
GEP |
110% |
84% |
90% |
86% |
79% |
Data source: Lemonade. YOY = year over year.
For the first quarter, Lemonade expects its IFP to rise 61% to 63% year over year and its GEP to grow 64% to 68%. For the full year, which includes its planned acquisition of the auto insurer Metromile (MILE +0.00%) in the second quarter, Lemonade expects its IFP to increase about 70%.
2. Mediocre retention rates
Lemonade ended Q4 with an annual dollar retention rate (ADR) of 82%. That represents a three percentage point improvement from a year ago, but the metric has also stayed flat for three straight quarters.
This indicates that nearly a fifth of Lemonade's customers aren't sticking around. Meanwhile, traditional insurers like Allstate (ALL 1.19%), Travelers (TRV 1.77%), and State Farm have all been rolling out similar AI algorithms and chatbots to their mobile apps. Those larger insurers can also afford to offer cheaper rates than Lemonade.
3. A rising gross loss ratio
The long-term sustainability of Lemonade's business model is measured by its gross loss ratio, which should ideally stay well below 100%. However, its gross loss ratio rose from 71% in 2020 to 90% in 2021.
That metric spiked in the first quarter of 2021 during the winter storms in Texas, then jumped again in Q4 as it generated a higher mix of its revenues from its newer home and pet insurance plans -- which book higher gross loss ratios than its core renters insurance business.
|
Metric |
FY 2020 |
Q1 2021 |
Q2 2021 |
Q3 2021 |
Q4 2021 |
|---|---|---|---|---|---|
|
Gross Loss Ratio |
71% |
121% |
74% |
77% |
96% |
Data source: Lemonade.
That imbalance could worsen after it integrates Metromile, which reported a loss ratio of 81.6% in the third quarter of 2021.
4. Declining margins and widening losses
Lemonade's slowing growth, mediocre retention rates, and rising gross loss ratios are all squeezing its adjusted gross margins. Meanwhile, its net loss widened from $122.3 million in 2020 to $241.3 million in 2021 and repeatedly widened sequentially throughout the entire year.
|
Metric |
FY 2020 |
Q1 2021 |
Q2 2021 |
Q3 2021 |
Q4 2021 |
|---|---|---|---|---|---|
|
Revenue (in millions) |
$94.4 |
$23.5 |
$28.2 |
$35.7 |
$41.0 |
|
Adjusted Gross Margin |
33% |
21% |
45% |
43% |
31% |
|
Net Loss (in millions) |
($122.3) |
($49.0) |
($55.6) |
($66.4) |
($70.3) |
Data source: Lemonade.
To make matters worse, Lemonade will soon add Metromile, which saw its net loss widen year over year from $36.4 million to $171.6 million in the first nine months of 2021, to that ocean of red ink.
Even on a more generous adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) basis -- which excludes its stock-based compensation, acquisition-related costs for Metromile, and other one-time expenses -- it expects to post a loss of $275-$290 million for the full year, compared to an adjusted EBITDA loss of $184 million in 2021.
5. The dilution and valuation
To fund its stock-based compensation (34% of its 2021 revenue) and all-stock takeover of Metromile, Lemonade has been diluting its shares. Its total number of weighted-average outstanding shares jumped 82% in 2021.
After its post-earnings plunge, Lemonade is still valued at about $1.1 billion -- more than five times its estimated revenue for 2022. That price-to-sales ratio might seem reasonable for a blue-chip tech stock with stable sales growth, but it's arguably too high for a small company with decelerating growth, widening losses, and a skyrocketing share count. Simply put, investors should steer clear of this sinking ship unless it starts patching up the leaks.
