Lemonade (LMND 6.68%) burst onto the public markets with a splash in July 2020, seeing its stock price skyrocket 164% in the first six months or so of trading. Besides the general love affair that investors had with fintech companies around that time, Lemonade's innovative business model was viewed by many as a major potential disruptor within the massive insurance industry.
But now the tables have turned. Lemonade shares are down a heart-stopping 93% since their all-time high more than two years ago. And daring investors are now mulling a potential opportunity: Is this beaten-down growth stock a buy right now? Let's take a closer look.
An innovative business model
The hype around Lemonade wasn't surprising, given the company's use of artificial intelligence to provide a better experience for its current and prospective policyholders. Customers looking for renters, home, auto, pet, or life insurance can get a policy in as little as 90 seconds. And policy holders can have a claim approved and paid out in three minutes. The goal for Lemonade was to make the entire process as user-friendly as possible. In fact, the company claims it has a net promoter score -- a measure of consumer satisfaction and support -- on par with some top consumer brands like Apple and Tesla.
There's another interesting twist with the business model. Lemonade is like a traditional insurance company in that it collects premiums, pays out claims, and must effectively manage risk. But Lemonade is also a certified B corporation, which means that it meets high standards when it comes to transparency, accountability, and social and environmental performance. After Lemonade takes a fee for its services, any unused premiums are sent to nonprofit organizations of the customer's choice.
This model has certainly gotten some traction. Between 2019 and 2022, customers increased 181%, in-force premiums rose 449%, and revenue jumped 281%. Even amid all the macroeconomic uncertainty, Lemonade was able to grow at an outstanding clip last year. And for the current year, management expects total revenue of between $375 million and $379 million, good for a 47% annual increase at the midpoint.
Because the insurance industry is so large, Lemonade's opportunity to continue stealing market share is also big. According to Wall Street analysts, the consensus forecast is that revenue will increase at a compound annual rate of more than 36% between 2022 and 2025. There's a lot of optimism surrounding this business and its long-term prospects.
Don't drink the lemonade
In addition to its disruptive potential, readers could quickly point to Lemonade's valuation as additional justification for adding the stock to their portfolios. Since Lemonade's initial public offering, shares have lost 81% of their value. With the stock so beaten down, it trades at a price-to-sales ratio of 3.2, which is about the cheapest it has been in Lemonade's entire public market history. Surely this is too good of an opportunity for investors to pass up, right?
While Lemonade's growth has been nothing short of astounding, I'm not convinced that the stock is a buy. At their core, companies are created to eventually produce profits, which ultimately drives stock prices over the long term. To consider owning an enterprise that isn't solely focused on that goal would be a mistake, in my opinion. If Lemonade can pay out extra premiums to charitable organizations, why not just price its insurance products lower to begin with? This way, it could attract even more customers by simply offering the best and most affordable product on the market.
And speaking of profits, they might be a pipe dream. In 2022, Lemonade posted a net loss of $297.8 million, compared to a net loss of $28.1 million in 2017. And this was during a five-year stretch when revenue increased from $2.4 million to $256.7 million.
"This quarter indicates we believe that peak losses are now behind us and that we're progressing per our plan along a path to profitability," said co-founder and Chief Executive Officer Daniel Schreiber on the Q4 2022 earnings call. He thinks the company can become profitable by 2026. Based on historical trends, I'm not too confident of that forecast.
Making matters worse for investors is Lemonade's burgeoning share count outstanding, which has nearly doubled during the past two years. Moreover, combined stock-based compensation of $103.4 million in 2021 and 2022 is a very real and sizable expense for this business. It's something that shareholders need to be mindful of, as it significantly dilutes their ownership stake in Lemonade. Taking all this into account, it's best to avoid this extremely risky stock.
