Insurance technology company Lemonade (LMND -2.58%) was one of the more volatile stocks in the market on Tuesday morning. After initially rising by more than 11%, Lemonade quickly gave its gains back and then some. As of 10:15 a.m. ET, Lemonade's stock was actually down by about 2%.
Lemonade reported its first-quarter earnings on Monday, and while the report wasn't necessarily bad, it wasn't good, either. In short, it seems like investors don't know how to reconcile the strong growth metrics with the red flags.
On the positive side, Lemonade's in-force premium grew by 66% year over year, and gross written premium (new business) grew by 71%. This indicates that not only is Lemonade's business growing rapidly, but it is also accelerating. And Lemonade Car (the company's highest-potential product) is active in two states, and the early results on customer bundling activity are very strong.
However, there's one big red flag. At the end of the day, this is an insurance company, and insurance companies need to get underwriting correct to consistently earn a profit. Lemonade's gross loss ratio of 90% is well above the company's 75% target, and the business is losing money fast. For 2022, it is projecting an adjusted loss on earnings before interest, taxes, depreciation, and amortization of $265 million to $280 million. Sure, the company has about $1 billion in cash on hand, but it won't for long unless it can figure out a path to profitability.
There are a few potential catalysts to watch. The pending acquisition of Metromile (MILE) is expected to close within the next few months, and could greatly accelerate the Lemonade Car rollout, as Metromile is already licensed in 49 states. And inflation is hurting the numbers right now, but premium increases tend to lag inflation, so this should start to work itself out.
The bottom line is that Lemonade gave investors plenty of reasons to be optimistic and plenty of reasons to be cautious in the same earnings report. And that's why we're seeing the stock struggle to find a direction.