Lemonade (LMND 1.95%) initially dazzled the bulls when it went public on July 2, 2020. The online insurer went public at $29, and its stock jumped 73% to $50.06 on the very first trade, eventually climbing to an all-time high of $183.26 on Jan. 11, 2021, during the buying frenzy in growth stocks. But as of this writing, Lemonade's stock trades at about $13 a share.

Investors soured on Lemonade as they fretted over its decelerating growth, persistent losses, and bubbly valuations in a tough market. Yet after that steep decline, Lemonade only trades at about 2 times this year's sales. Could this former market darling make lemonade from lemons again if a new bull market starts?

Two friends drink lemonade in the back of a van.

Image source: Getty Images.

A simpler approach to selling insurance

Lemonade is challenging traditional insurers with a chatbot-powered app that streamlines the complex process of buying insurance plans. Its app can arrange for an insurance policy for its customers within 90 seconds and it can process their claims in less than three minutes.

Lemonade only provided homeowners and renters insurance at the time of its initial public offering (IPO), and it still generates most of its revenue from those policies. But after it went public, it expanded into the term life, pet health, and auto insurance markets. It significantly accelerated its expansion into the auto insurance market by acquiring Metromile last July.

Lemonade's digital-first approach made it a popular choice for younger and first-time insurance buyers. That's why approximately 70% of its customers were under the age of 35 at the time of its IPO. It ended 2022 with 1.81 million customers, but it's still a tiny underdog compared to traditional insurers like State Farm and Allstate.

Is Lemonade still growing?

Lemonade's business can be gauged by five main growth metrics -- its total number of customers, its premium per customer, its in-force premiums (IFP), its gross earned premiums (GEP), and its annual dollar retention (ADR) rate.

Metric

2020

2021

2022

Customer growth

56%

43%

27%

In-force premiums growth

87%

78%

64%

Gross earned premiums growth

110%

84%

68%

Premium per customer growth

20%

25%

30%

Annual dollar retention rate

79%

82%

86%

Data source: Lemonade.

Lemonade's growth in total customers and premiums (as seen in its IFP and GEP) have cooled since its IPO, even after it gained more than 100,000 drivers from Metromile last July. That slowdown was exacerbated by its launch of "proportional reinsurance agreements" in 2020, which ceded 75% of its premiums to reinsurers in exchange for a 25% "ceding commission" for every dollar. That shift enabled Lemonade to take on less risk in exchange for lower premiums per customer.

Lemonade's growth in premiums per customer stabilized after it lapped that strategic shift in 2021, then accelerated again in 2022 as more customers signed up for its newer term life, pet health, and auto policies. Its ADR rate also continued to rise -- which suggests that its ecosystem is still sticky and it isn't losing customers to older insurers.

Lemonade's revenue rose 40% in 2020, grew 36% in 2021, and jumped 100% to $256.7 million in 2022 as it acquired Metromile. For 2023, it expects its revenue to rise 46% to 48% as it partly laps that acquisition.

But it only expects its IFP to rise 11% to 12% and for its GEP to increase 29% to 30% in 2023, so its core business is still slowing down. Analysts expect its revenue to rise 48% this year, but to only grow 25% in 2024 after it fully laps the Metromile deal.

Will Lemonade ever turn a profit?

Even if Lemonade only grows its revenue at about 20% per year, it would still be growing much faster than traditional insurers like Allstate, which is growing at single-digit rates. But unlike Allstate, Lemonade is still deeply unprofitable because economies of scale haven't kicked in yet. They also probably won't kick in until Lemonade gains tens of millions of new customers -- but that could be tough to achieve as its growth cools off.

Lemonade's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) losses have widened significantly since its IPO, and it expects to book an even wider loss of $240 million to $245 million in 2023. Meanwhile, its adjusted gross margin is contracting and its gross loss ratio is rising to uncomfortable levels.

Metric

2020

2021

2022

Adjusted gross margin

33%

36%

25%

Gross loss ratio

71%

90%

90%

Adjusted EBITDA

($97.9 million)

($184.2 million)

($225.1 million)

Data source: Lemonade.

Lemonade still held $1.04 billion in cash, cash equivalents, and investments at the end of 2022, so it won't go bankrupt anytime soon. But it will also struggle to convince investors that its business model is sustainable unless it expands its gross margin, reduces its gross loss ratio, and meaningfully narrows its losses.

It won't revisit its IPO price anytime soon

A new bull market might start this year, but I don't expect investors to flock back to Lemonade. It's still running its business more like a start-up than a publicly traded company, and it won't impress the bulls again until it scales up its business.