Lemonade (LMND 1.44%) attracted a stampede of bulls when it went public on July 2, 2020. The online insurer initially impressed investors with the disruptive potential of its artificial intelligence-powered chatbot app, which simplified the byzantine process of buying insurance plans for younger buyers, and its explosive growth rates.
It listed its shares at $29, which opened at $50.06 on the first day and eventually skyrocketed to an all-time high of $183.26 on Jan. 11, 2021. But today, Lemonade stock trades at about $12. Like many other hot tech stocks, Lemonade lost its luster as rising interest rates popped its bubbly valuations and forced investors to focus on its cooling growth and widening losses.
A modest $2,000 investment in Lemonade's IPO would have grown to $12,639 at its peak before shriveling back to about $830. Let's see why Lemonade's stock went sour, and if it will sweeten up again when a new bull market starts.
Image source: Getty Images.
A tiny underdog with decelerating growth
When Lemonade went public, it only provided homeowners and renters insurance. But after its public debut, it expanded into the term life, pet, and auto insurance markets. Lemonade enabled its customers to easily sign up for its insurance plans and process their claims through a single chatbot-powered app. At the time of its IPO, about 70% of its customers were under the age of 35 -- so its approach was clearly winning over younger and first-time insurance buyers.
Lemonade ended 2022 with 1.8 million customers, compared to 1 million customers at the end of 2020. That growth rate sounds impressive, but Lemonade is still tiny compared to traditional insurers like Allstate (ALL 0.04%), which serves about 16 million customers, and State Farm, which has over 85 million in-force policies.
For Lemonade to disrupt those insurance titans, it would need to grow its customer base at triple-digit rates every year. But over the past three years, its growth in customers, in-force premiums (IFP), and gross earned premiums (GEP) have all cooled off -- even as it launched new types of policies to gain more customers. Its gross margins are also declining, which suggests it doesn't have much pricing power, and its gross loss ratios are uncomfortably high.
|
Metric |
2020 |
2021 |
2022 |
|---|---|---|---|
|
Customer growth |
56% |
43% |
27% |
|
IFP growth |
87% |
78% |
64% |
|
GEP growth |
110% |
84% |
68% |
|
Adjusted gross margin |
33% |
36% |
25% |
|
Gross loss ratio |
71% |
90% |
90% |
Data source: Lemonade.
That slowdown occurred even after it acquired Metromile last July to accelerate its launch of Lemonade Auto. It's only rolled out Lemonade Auto in five states so far, but it already faces stiff competition from entrenched leaders like Allstate.
For 2023, Lemonade only expects its IFP to rise 11%-12% as its GEP grows 29%-30%. Analysts expect its revenue to rise 48% to $381 million this year, but to only grow 25% in 2024 after it fully laps its takeover of Metromile. That deceleration suggests that Lemonade will struggle to break out of its niche and evolve into a leading insurance platform.
There's no visible path to profitability
The insurance market is dominated by large companies because their scale naturally prevents smaller companies from gaining ground. That's why Lemonade's net losses have widened every year since its IPO.
Even on a more forgiving adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) basis, Lemonade's loss widened from $98 million in 2020 to $184 million in 2021, and widened again to $225 million in 2022. Analysts anticipate an even wider adjusted EBITDA loss of $240 million in 2023.
Lemonade believes it can eventually dig itself out of that hole by expanding into higher premium markets (like auto insurance) to boost its premiums per customer. But it still generates most of its revenue from homeowners and renters insurance -- which brings in lower premiums and is heavily exposed to natural disasters. For example, the Texas winter storm in early 2021 caused Lemonade's gross loss ratio to temporarily surge above 100%.
At the same time, many traditional insurance companies have been launching similar AI-powered chatbot apps to counter Lemonade. Lemonade's annual dollar retention (ADR) rate of 86% at the end of 2022 suggests that around 14% of its customers are being lured away by those market leaders and other competitors.
Lemonade is turning into lemons again
Lemonade might seem cheap at 2 times this year's sales, but many traditional insurers like Allstate trade at less than this year's sales. If Lemonade is simply another insurance company -- instead of the disruptive AI-powered platform it claims to be -- then its stock could still be cut in half again as its growth cools off. In short, Lemonade's stock could remain in the penalty box for a long time -- and a new bull market probably won't boost its shares back to its IPO price.
