Is Lemonade Stock a Buy?

Lemonade (LMND 0.83%) posted its first-quarter earnings report on May 9. The online insurance provider's revenue rose 89% year over year to $44.3 million, which beat analysts' estimates by $1.1 million.

Its net loss widened from $49 million to $74.8 million, or $1.21 per share, but still exceeded analysts' expectations by $0.23. Its loss based on adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) also widened, from $41.3 million to $57.4 million.

Lemonade's headline numbers were mixed, and its stock remains nearly 40% below its initial public offering (IPO) price and 90% below its all-time high. Should investors accumulate some shares of this deflated growth stock today?

Image source: Getty Images.

How fast is Lemonade growing?

Lemonade bundles homeowners, renters, term life, pet health, and auto insurance in a single app powered by artificial intelligence (AI). It claims this streamlined approach, which runs on chatbots and AI algorithms, simplifies the byzantine process of buying insurance policies and processing claims.

During the first quarter, Lemonade's total number of customers grew 37% year over year to 1.5 million. Its premium per customer increased 22% to $279, its in-force premium (IFP) rose 66% to $419 million, and its gross earned premium (GEP) grew 71% to $96 million. But all four growth rates have decelerated over the past several quarters:

Data source: Lemonade. YOY = year over year.

In the second quarter, Lemonade expects this slowdown to continue with 50% to 52% IFP growth and 54% to 57% GEP growth. That forecast excludes its planned takeover of Metromile (MILE), which will likely close in the second quarter and expand its fledgling auto insurance business.

For the full year (excluding Metromile), Lemonade expects its IFP to rise by 41% to 43%, its GEP to climb 46% to 47%, and its revenue to grow by 60% to 62%.

That might seem like an acceleration from its 36% revenue growth in 2021, but its top-line growth was temporarily throttled last year by the introduction of "proportional reinsurance agreements" in the second half of 2020. Under that new model, Lemonade started ceding 75% of its premiums to reinsurers in exchange for a 25% "ceding commission" for every ceded dollar -- which boosted its adjusted gross margin but reduced its total revenue.

Including Metromile, Lemonade expects its IFP to grow more than 70% for the full year, but it didn't provide any exact revenue guidance for the combined company. Based on analysts' projections for Metromile, Lemonade's reported revenue could more than double for the full year as a combined company. Next year, its revenue could grow about 65% on a pro forma basis.

But buying Metromile will result in wider losses

Lemonade's adjusted gross margin rose 16 percentage points year over year to 37% in the first quarter, but it faced a very easy comparison to the devastating winter storms in Texas a year earlier.

On a sequential basis, its adjusted gross margin fell 6 percentage points. On the bright side, its gross loss ratio improved both sequentially and year over year.

Data source: Lemonade.

However, taking over Metromile -- which ended last year with a negative gross margin of 14.5%, a direct loss ratio of 78.4%, and a net loss of $216.5 million -- will make it even more difficult for Lemonade to narrow its net losses.

The other red flags are easy to spot

Lemonade is still growing, but it's still a tiny fish in a sea filled with sharks like Allstate, Travelers, and State Farm. For Lemonade to be truly disruptive, it still needs to gain millions of new customers and firmly lock them in to its ecosystem.

Unfortunately, its retention rates seem to be peaking. Its annual dollar retention (ADR) rate improved by 1 percentage point year over year to 82% in the second quarter, but it has stayed at 82% for four straight quarters. In other words, nearly a fifth of Lemonade's customers aren't sticking around.

The lack of insider confidence is also troubling. Over the past 12 months, Lemonade's insiders sold 29 times as many shares as they bought. Over the past three months, they didn't buy a single share -- even as its stock plunged far below its IPO price.

It's still not a value play in this tough market

Lemonade has disruptive potential, and it might seem reasonably valued at less than six times this year's sales.

However, its customer base is still too small, its organic growth is decelerating, its losses are widening, and it is buying other unprofitable businesses as its retention rates stall out. Simply put, Lemonade's stock could easily be cut in half before it's considered a bargain, so investors should stick with better stocks in this challenging market.