Lemonade (LMND -2.12%) has emerged in recent years as one of the most popular and interesting fintech stocks in the insurance industry. This digital disruptor uses artificial intelligence (AI) and machine learning to issue policies and handle most claims in a matter of minutes, and everything is done through an app or online.
Its business model is also different from that of traditional insurers. If anything is left after the claims and expenses are paid, the money goes to the charity of the customer's choice. Typical insurers profit from these unclaimed premiums.
It is a great model and a terrific company that has been expanding its customer base quite rapidly. Moreover, the stock has surged this year, up about 7% to about $15 per share, after a difficult two years. While it might look enticing at its reduced stock price, I'm not ready to buy. Here's why.
A strong fourth quarter
Lemonade went public in July 2020 at $29 per share and on its first day of trading, July 2, it hit about $50 per share. It finished 2020 up about 109% and on Feb. 4, 2021, it closed at an all-time high of about $164.
It had surged based on its robust customer and user growth and from excitement about its disruptive technology. But like many speculative fintechs post-pandemic, it came crashing down. The stock price plummeted 66% in 2021 and 67% in 2022.
The recent share price might look enticing, and its price-to-sales ratio is down to about 4.6, which is still a bit high, but way down from 23 at the end of 2021, and 12.6 about a year ago.
It looks even more compelling when you consider the fact that it expanded into the potentially lucrative car insurance business with the acquisition of Metromile last year. It now offers renters, homeowners, pet, life, and car policies. It has also continued to grow and improve in some key metrics.
In the fourth quarter and year-end earnings report, Lemonadeʻs in-force premiums were up 64% year over year to $625 million while the gross earned premium was up 69% to $151 million. Also, the gross loss ratio dropped to 89% at the end of the fourth quarter, down from 96% at the end of the 2021. The lower the gross loss ratio, the more profitable the company is. In addition, the total number of customers grew 27% year over year to 1.8 million.
Ultimately, Lemonade saw a 115% spike in revenue to $88.5 million in the quarter. There is a lot to like there, but on the other hand, there are some concerns.
Growing pains?
The primary concern about Lemonade right now is its lack of profitability. It had a net loss of $63.7 million ($0.93 per share) in the most recent quarter, down slightly from a net loss of $70.3 million a year earlier.
Also, on the basis of earnings before interest, taxes, depreciation, and amortization (EBITDA), the company posted an adjusted loss of $51.7 million in the quarter, up from $51.2 million a year ago. For all of 2022, Lemonade had a net loss of $298 million, up from a net loss of $241 million the previous year.
Furthermore, operating expenses were up about 12% year over year to $95 million, with costs associated with the acquisition of Metromile as the primary driver. It is certainly not unusual for a rapidly growing young company to have rising expenses related to acquisitions and capital expenditures. But you do want to see continued progress toward profitability, and the company's forecast for 2023 doesn't indicate that this is the case.
Lemonade anticipates an adjusted EBITDA loss of $63 million to $65 million in the first quarter, which is up considerably from the fourth quarter. For the full year, the company projects an adjusted EBITDA loss of $240 million to $245 million, up from $225 million in 2022.
This suggests that there could be another year of growing pains for Lemonade. If I owned the stock, I would hold, because there is a lot of potential for it to be that disruptor down the road. But for those kicking the tires, it is probably best to wait a few quarters to get a better sense of its path to profitability.
