Lemonade (LMND -2.23%) has taken investors on a wild ride since its public debut in July 2020. The online insurer went public at $29 per share, hit an all-time high of $183.26 last January, but eventually tumbled back to about $22. It initially dazzled the bulls with the disruptive potential of its artificial intelligence (AI)-powered platform, which streamlined the insurance purchasing process with a chatbot-powered app, and the fact that its revenue more than tripled to $63.8 million in 2019.

However, Lemonade's slowing growth, persistent losses, and frothy valuation all subsequently made it an unappealing investment as rising interest rates drove investors toward more conservative investments. The bears have clearly been winning that battle over the past year, but could the bulls sweeten up Lemonade's stock again?

Two people drink lemonade in the back of a van.

Image source: Getty Images.

What the bears will tell you about Lemonade

Lemonade initially only provided homeowners and renters insurance, and it still generates most of its revenue from those core policies. But after its IPO, it expanded into the term life, pet health, and auto insurance markets. Launching those services should have boosted its four core growth metrics: its number of customers, premium per customer, in-force premiums (IFP), and gross earned premiums (GEP). However, all four growth rates decelerated significantly over the past year:

Metric

Q2 2022

Q1 2022

Q4 2021

Q3 2021

Q2 2021

Customer growth (YOY)

31%

37%

43%

45%

48%

Premium per customer growth (YOY)

18%

22%

25%

26%

29%

IFP growth (YOY)

54%

66%

78%

84%

91%

GEP growth (YOY)

60%

71%

79%

86%

90%

Data source: Lemonade. YOY = Year-over-year.

Lemonade ended the second quarter of 2022 with over 1.5 million customers. That makes it much smaller than traditional insurers like State Farm and Allstate, which have also been rolling out similar AI-powered apps.

Lemonade expects its year-over-year growth in IFP and GEP to accelerate again in the third quarter, but that's only because it acquired Metromile in late July to accelerate the expansion of its new Lemonade Car business. Metromile is still unprofitable, and its integration will likely squeeze Lemonade's gross margin, keep its gross loss ratio elevated, and keep it unprofitable in both generally accepted accounting principles (GAAP) and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) terms. All those metrics had already been headed in the wrong direction prior to its purchase of Metromile:

Metric

Q2 2022

Q1 2022

Q4 2021

Q3 2021

Q2 2021

Adjusted gross margin

35%

37%

31%

43%

45%

Gross loss ratio

86%

90%

96%

77%

74%

Net income

($67.9)

($74.8)

($70.3)

($66.4)

($55.6)

Adjusted EBITDA

($50.3)

($41.3)

($51.2)

($51.3)

($40.4)

Data source: Lemonade. Millions USD.

For the full year, Lemonade expects its IFP to grow 60% to 62% and for its GEP to increase 63% to 64%. Those numbers, which include Metromile, would represent a slowdown from its 78% IFP growth and 84% GEP growth in 2021.

Lemonade still expects its revenue to rise 84% to 86% for the full year, compared to its 36% growth in 2020. But that doesn't represent a meaningful acceleration: It throttled its own growth in 2020 by launching "proportional reinsurance contracts," which ceded 75% of its premiums to reinsurers in exchange for a 25% "ceding commission" for every ceded dollar. That shift enabled Lemonade to pass on some of its risks to reinsurers, but it also reduced its average revenue per customer.

Analysts expect Lemonade's revenue to rise 87% this year, then grow 60% in 2023 (including its inorganic gains from Metromile), but rise just 26% in 2024 as it fully laps that acquisition. It's also expected to remain unprofitable by both GAAP and adjusted EBITDA measures through 2024.

What the bulls will tell you about Lemonade

The bulls believe Lemonade's AI-powered platform, which the company claims insures customers in 90 seconds and processes claims in less than three minutes, will continue to lock in younger and first-time insurance buyers who are used to doing everything on mobile apps. That's why about 70% of Lemonade's customers were under the age of 35 at the time of its IPO.

The bulls expect the expansion of Lemonade Car to significantly boost its revenue per customer over the long term, since auto insurance policies cost a lot more than homeowners and renters insurance. Its special discounts and towing services for electric vehicle (EV) owners might also make it a good long-term play on the secular expansion of the EV market.

The bulls will also note that Lemonade's low debt-to-equity ratio of 0.7 still gives it room to raise more cash if its liquidity dries up. Its stock also looks reasonably valued at just four times next year's sales, and that lower valuation might make it a compelling takeover target for traditional insurers or other fintech companies.

The bears still have the upper hand

Lemonade is still growing, but it needs to grow a lot faster to prove that it can disrupt legacy insurers. Otherwise, it's just a tiny insurance company with a catchy brand, an AI-powered chatbot, and lots of red ink. I'll need to see Lemonade's growth in customers, IFP, and GEP accelerate significantly before I consider it to be a worthwhile turnaround play.