There are two main types of companies investors are shunning this year: those in the technology sector, and those which serve consumers. Unfortunately for Lemonade (LMND 0.71%), the artificial intelligence-driven insurance company is both.
Inflation is elevated, which forced the U.S. Federal Reserve to aggressively hike interest rates to try to tamp it back toward a more normal rate. As a result, consumers are being hit by a combination of higher prices on everyday goods and services and higher borrowing costs. Tech companies, in a similar vein, struggle when the cost of capital rises because money is harder to come by to fund growth.
But these headwinds won't last forever. Lemonade just delivered yet another strong quarterly result for the period that ended Sept. 30, and it believes it can reach profitability with the money it already has on hand. With its stock price down 88% from its all-time high, here's why investors might want to buy now.
The Lemonade difference
Most consumers can point to at least a couple of things they dislike about dealing with traditional insurance companies, whether it's the customer experience or the time it takes to process and pay out a claim. The industry isn't known for innovating -- but then Lemonade came along.
Lemonade has developed artificial intelligence (AI) to revamp customer interactions and the way premiums are paid. Its online bot, Maya, can quote an insurance policy in 90 seconds and pay out claims within three minutes without human input. The company now operates in five insurance markets: homeowners, renters, life, pet, and car, which is its latest addition.
Lemonade is also breaking new ground outside America, having launched contents (renters) insurance in the United Kingdom during the recent third quarter. It follows the company's previous entry into Germany, the Netherlands, and France.
Overall, Lemonade's unique technology-centric approach is resonating with customers, probably because it brings insurance in line with other goods and services consumers are used to buying online quickly, easily, and with a high level of convenience. In the third quarter, the company had over 1.77 million customers, which was a 30% jump compared to the same time last year.
Additionally, its premium per customer soared to another all-time high as more Lemonade customers purchased multiple products.
Lemonade's in-force premium is soaring
Perhaps the most significant takeaway from Lemonade's Q3 report was the 76% jump in its in-force premium. It's the dollar value of the premiums for all active policies, and it increased to a record high of $609 million during the period. It was helped by Lemonade's recent acquisition of AI-powered insurer MetroMile, which added 32 percentage points to the result.
The blockbuster rate of growth is also a consequence of Lemonade's rapidly expanding customer base, as well as the fact that each customer continues to spend more money with the company over time.
One thing worrying investors is Lemonade's gross loss ratio -- the proportion of premiums it pays out to fund claims -- which came in at 94% in Q3. That's firmly above the 75% level it strives for, and it's going to be difficult for the company to become profitable if it remains this high. It was 77% a year ago, and the jump is mainly attributable to short-term factors like Hurricane Ian in Florida and Lemonade's acquisition of MetroMile.
Lemonade reported a net loss of $91 million for the quarter, which brought its total net loss to $304 million over the last four quarters. But the company sees a light at the end of the tunnel because it believes it can reach profitability with the cash it has on hand. That would be a huge positive for investors because it means they won't have to endure a dilutive capital raise, especially at Lemonade's currently suppressed share price.
Why Lemonade stock is a buy on the dip
Lemonade's upcoming fourth-quarter results may not be as strong as Q3, because the company pulled forward some of its marketing efforts to get a better return on investment. It says Q4 is typically weak due to seasonality.
But this is a long-term story. Take Lemonade's car insurance business, for example, which it only entered last year. It's a $316 billion annual opportunity in the U.S. alone, which leaves plenty of room for growth compared to the company's total existing in-force premium.
Plus, Lemonade just agreed to a deal with Chewy, a pet-products retailer, to offer Lemonade pet insurance to its 20 million customers. The partnership is slated to kick off in 2023, and it could offer a positive boost to Lemonade's customer base.
All things considered, Lemonade has an exceptional growth runway ahead. The risk is that it fails to generate a profit in the near term as intended, but this weak economy and the pessimistic tone toward tech companies won't last forever. If it can weather these conditions, it will possibly find itself in a more favorable position a year or two from now.
With Lemonade stock down 88% from its all-time high, the risk versus reward equation might make sense for investors here.
