The technology-focused Nasdaq 100 has mustered a return of nearly 11% over the past month alone, as investors hunt for bargains after a tumultuous first half of 2022. Still, the index remains in bear-market territory for now.
But shares of Lemonade (LMND -2.56%) have bounced a whopping 46% in the past 30 days, more than quadrupling the return of the Nasdaq 100. The company is a small but mighty insurer driven by artificial intelligence (AI), and its results for the second quarter, reported Aug. 9, contributed to its recent strength.
Lemonade stock was down more than 90% from its all-time high last year and remains 82% off that peak even after the recent surge. But the company might have turned a corner, and that could mean major upside for investors.
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Lemonade is highly (artificially) intelligent
Lemonade is a true disrupter, and it's going after an insurance industry that is dominated by entrenched players and traditional underwriting models. The company is using advanced technology like AI and machine learning to create better insurance products and improve the customer experience.
When consumers visit Lemonade's website, they have the opportunity to interact with Maya, a web-based bot powered by AI. It can write insurance quotes in less than 90 seconds, and for existing customers, it can process and pay claims in three minutes or less. It's revolutionary for anyone who has spent time going through the long-winded claims process for traditional insurers.
When it comes to pricing premiums, Lemonade relies on mountains of data to feed its AI models. In the second quarter, it released its sixth-generation lifetime value model (LTV6), which is its most-advanced predictive AI to date. It provides a lifetime value prediction for customers based on their likelihood to make a claim, leave for another insurer, or even buy additional products from the company.
LTV6 also detects inefficiencies across Lemonade's business. The company currently operates in the renters, homeowners, pet, life, and car insurance markets. In the second quarter, the new model determined that many homeowner policies in California wouldn't be profitable despite prior evidence to the contrary. And on the flip side, it highlighted a major opportunity in the pet insurance segment. This allowed Lemonade to make rapid adjustments on the fly.
Ultimately, LVT6 is a major step in the company's goal to reach an average loss ratio of under 75%, which is a key to long-term profitability.
Lemonade's path to profits
Lemonade is a money-losing company, and those losses have been steep. In 2021, it was in the red by $246 million, and a further $142 million has gone out the door in the first half of 2022.
But in a series of second-quarter remarks, Lemonade told investors it would reach profitability with the capital it has on hand. This is a big positive for shareholders because it means there won't be further dilution by raising more capital in the near term. The company expects its losses will peak in the third (current) quarter, before steadily moving toward the black.
It will come with reduced costs and continued growth fueled by the investments it has made over the last few years. In the second quarter, Lemonade's in-force premiums jumped 54% year over year to $458 million. Its premium per customer also reached an all-time high of $290, driven partly by an increase in cross-sells (customers buying multiple Lemonade policies).
The result was a whopping 77% jump in its second-quarter revenue to $50 million.
There's still time to buy Lemonade stock
Despite the 46% surge in Lemonade stock over the last month, there's still room for more upside, especially in the long run. Its customer base has grown by 31% over the past 12 months to 1.58 million, but it has only scratched the surface of its opportunity.
The company entered the car insurance market last year, and its progress was accelerated by the acquisition of MetroMile. Before the deal, the car segment was 1% of Lemonade's business, but it immediately rose to 20% thanks to the customers, state licenses, and data MetroMile contributed.
There are an estimated 198 million car insurance policy holders in the U.S. and the industry could be worth over $316 billion in 2022 alone. That gives Lemonade plenty of runway for growth and lots of upside in its stock.
The exciting part is that auto insurance is just one of Lemonade's five segments, with many more likely to be added in the future.
