Digital insurance company Lemonade (LMND +0.88%) has been one of the market's most volatile stocks, trading as high as $183 early last year before plunging to just $16 per share during this bear market, a breathtaking 91% decline from its peak. The stock remains near its lows at $22 per share.
The company uses artificial intelligence to streamline its operations and is growing faster than most of its competitors. However, the business is losing money, which doesn't fly in this market.
Lemonade remains one of the more speculative stocks out there, but here is why it might be more attractive than ever.
NYSE: LMND
Key Data Points
Losses could be peaking at the right time
Lemonade is currently very unprofitable. The company is an emerging competitor in a multitrillion-dollar insurance industry that's ruthlessly competitive. Lemonade's much smaller than its larger rivals like GEICO or Allstate, and it must spend aggressively on marketing to gain mindshare from consumers. At the same time, it's developing new insurance products that typically carry higher losses as the company works through the learning curve of analyzing risk for these policies without as much historical data as others have.
You can see below that Lemonade's trailing-12-month revenue just recently surpassed its marketing spend:
LMND Sales and Marketing Expense (TTM) data by YCharts.
But Lemonade's rapidly growing: It now has 1.58 million customers as of the second quarter, up 31% year over year. The company uses AI-powered chatbots on its smartphone apps to handle most customer-facing interactions, cutting costs and giving users a more digital experience. Lemonade's product offering resonates with customers; its iPhone app has an overall rating of 4.9 stars out of five from almost 60,000 reviews.
Perhaps the most significant development of all in Lemonade's Q2 results was management's forecast that the company's financial losses, measured as EBITDA (earnings before interest, taxes, deprecation, and amortization), will peak next quarter and improve after that until hitting profitability. Management believes it has enough cash on the balance sheet to reach profitability.
Raising money is a company's worst nightmare in a bear market or recession; debt often comes with higher interest rates and is harder to secure, while issuing new shares can dilute investors (increasing the number of shares outstanding makes them less valuable). It's a huge positive if Lemonade can work toward turning a profit without raising more money.
Metromile is a win
Lemonade recently closed its $145 million acquisition of Metromile, an insurance company that uses telematics to charge automotive insurance by the mile. Lemonade got a seemingly great deal, as the acquisition occurred in the depths of the current bear market.
The company is getting a lot for its money, including Metromile's 100,000 existing customers generating $110 million of in-force premium, $155 million in cash, and insurance licenses for 49 states. Metromile struggled as its own company, but Lemonade can use these assets to help bolster the automotive insurance product it recently launched.
It's hard to find fault with Lemonade's purchase. Metromile's cash balance alone means that Lemonade got everything else for basically nothing. The company has an opportunity to cross-sell to these new customers, and the insurance licenses help save it the time and effort of working through the regulatory process itself.
The stock's decline makes it far less risky
Lemonade remains a speculative investment as an up-and-comer trying to make headway in a competitive market full of established companies. The stock didn't offer any margin for error when it traded at more than $180 per share. You can see below the stock's price-to-book (P/B) valuation was a clear outlier compared to other insurance companies:
LMND Price to Book Value data by YCharts.
But a declining share price has brought Lemonade down to a similar level as its peers, so investors can now begin appreciating the positives of the business. Lemonade grew customers by 31% year over year in Q2. For comparison, Allstate's policy count shrunk by 0.9% in the first six months of this year. Customers are choosing Lemonade, who claims that most of its customers come from existing policies with established peers.
Lemonade must continue executing, keeping customer growth going while hitting its financial goals, starting with peak losses next quarter. Investors should follow the company's progress closely, and Lemonade's story might play out over several years. However, the stock's valuation leaves room for potential upside, and Lemonade's fundamentals are arguably more robust than ever. The risk versus reward seems favorable here, which is why Lemonade stock has become so intriguing.
