Shares of Lemonade (LMND -1.08%) soared as much as 33.2% this week, according to data from S&P Global Market Intelligence. The insurance start-up posted better-than-expected revenue and earnings for the second quarter. As of this writing, after the close on Thursday, Aug. 11, the stock is up 26.3% this week.
Lemonade reported earnings on Tuesday, Aug. 9. Revenue grew 77% year over year to $50 million, and net loss was $67.9 million, or $1.10 per share. These beat analyst expectations for $47.6 million in revenue and a net loss of $1.33 per share. This earnings beat (even though it was a loss) likely caused Lemonade's stock to soar this week.
It is also possible Lemonade's stock popped so quickly because so many of its shares are sold short. According to YCharts, an estimated 13.05 million of Lemonade's 62 million shares outstanding are being loaned to short-sellers. If short-sellers decide to buy these shares back, it can put some upward momentum on the share price. This is called a short squeeze and could have happened with Lemonade stock this week.
Revenue is rising fast at Lemonade, but investors need to be watchful for how much money it is losing. The company is spending a ton on sales and marketing right now ($37 million compared to just $50 million in revenue last quarter), which can be a good thing as long as revenue is growing quickly. But this cannot last forever, and the company eventually needs to turn profitable.
The good thing for Lemonade investors? The company has a ton of cash on its balance sheet, $1 billion at the end of last quarter. This gives management multiple years of runway even if it loses close to $75 million a quarter as it did in Q2. However, investors still need to be mindful of Lemonade's unit economics and whether it is building a sustainable insurance business. The start-up is going up against highly experienced companies like Progressive, Geico, and others as it tries to tackle the complicated insurance market. If you are going to invest in the stock, you need to be sure the company is selling insurance at a profitable rate and not just growing for the sake of growth. That can spell trouble for finance and insurance-related businesses if done improperly.