Digital insurance company Lemonade (LMND +0.88%) reports third-quarter earnings next week, but management has already given shareholders some insight into the quarter's financials. In the second-quarter shareholder letter, Chief Executive Officer Daniel Schreiber said that the company expected losses to peak in the third quarter, and that earnings before interest, taxes, depreciation, and amortization (EBITDA) are "expected to improve thereafter, through to profitability."
That heralds both good and bad news for the third quarter, and it means now might be a great opportunity to buy Lemonade stock before it rockets.
A different kind of insurance company
When Lemonade first became a publicly traded company, investors noted its unusual B-corporation status. That still features in its model, but as it grows, it's looking more like a standard insurance company, just built for the modern era.
NYSE: LMND
Key Data Points
Lemonade gets the B-corporation designation because it has a social mission. If there are funds remaining after it pays its reinsurers and takes its cut, it gives them to charity. But that's just the beginning of what makes Lemonade different.
This setup means that Lemonade doesn't have an incentive to deny claims, because paying claims doesn't give it extra money. That's part of its greater emphasis on the customer experience. Some other parts are simple sign-up and claim-filing processes, which are designed to be completely digital.
The company has built up an impressive customer count that exceeded 1.5 million as of the end of the second quarter. It has outlined a very specific growth road map, which involves scaling up with rollouts of new products, and it has already achieved high growth in revenue and new policies. It's now turning its focus toward profitability.
Is profitability within striking distance?
As with many start-ups, management seemed to be very comfortable burning through cash to reach scale. Unlike many growth companies, though, it does seem to have a plausible path to profitability.
Losses have only widened over the past few years. Schreiber explained that when it was cheap to borrow, Lemonade took the opportunity to borrow and expand. It launched new products and entered new markets, notably its acquisition of auto insurer Metromile. That purchase was not received enthusiastically by investors, but it fit into the company's growth strategy.
Now that interest rates are rising, management is putting the brakes on unimpeded growth, and it says it will not need to borrow in the near future.
Given this change, it expects 2022 EBITDA to be better than originally anticipated. Management had projected a loss of $265 million to $280 million, and it now expects a loss of $240 million to $245 million.
The third-quarter report might be very telling
Schreiber said that this period is likely to be the peak of its losses. If the loss is narrower than expected, that might give the stock a nice boost. If it goes according to management's estimates, performance should already be improving in the current fourth quarter. Losses are not the only concern here; the other metric to look out for is the loss ratio, or the difference between what an insurer collects in premiums versus what it pay out in claims. But as losses narrow, investor confidence probably will also look up.
The insurance industry is generally resistant to inflation. Policy holders don't drop their policies when they're reducing spending. That gives Lemonade some breathing room while the market is volatile and many industries are suffering. Insurance stocks are usually seen as strong value plays, partly for this reason. I wouldn't call Lemonade a value stock at all, because it doesn't have many of the other value features of insurance stocks such as slow growth and a low valuation. However, this is an advantageous feature of the insurance industry that Lemonade benefits from.
Soaring sales, tanking stock price
Second-quarter revenue rose 77% from a year earlier, and Schreiber said that Lemonade "still anticipate(s) solid double-digit growth for as far as the eye can see." But while Lemonade has made robust progress on all of its growth fronts, including gross earned premium, premium per customer, and new customers, its stock price has plummeted. It's down 61% during the past year, and shares trade 82% below their value at the stock's high last year.
With a solid third-quarter report, the stock is likely to gain. From there, if Lemonade proceeds according to its plan for profitability, shares should stay in the gain zone.
There are a lot of ifs here. But if you have some tolerance for risk and have been considering a position in Lemonade, now might be an excellent time to start.
