After hitting a high of $164 per share in 2021, Lemonade (LMND 1.07%) stock has been sinking and sinking, falling to less than $11 last week. That might have been rock bottom, because the stock soared this week after a massive earnings beat and excellent first-quarter operating results.
Management has changed its strategy over the past few months, and part of that pivot contributed to the outstanding report. But part of the strategy didn't work out quite as planned. Oddly enough, that also turned out to be fantastic news. Here's why.
The end of a rapid launch
Investors lost patience with Lemonade over the past few months as losses mounted, and it was unclear whether its business was viable. However, things mostly went according to management's original plan, which called for losses as the company rolled out a complete array of insurance products. It's a typical growth plan for new tech companies, and it might have been embraced in a continued bull market. But overall poor market conditions have sent investors fleeing toward safer stocks and abandoning riskier ones.
Now that the company is done with its product rollouts, at least for the time being, it's working on tightening expenses and improving its loss ratio. Shareholders didn't react positively when the company originally shared that news, choosing instead to wait to see the outcome.
The results are in
The shift showed real improvement, thus pleased investors sent the stock soaring. The new plan is working. The first evidence is the loss ratio, which is the measurement of how much of a policy Lemonade is paying out in claims. Lemonade uses sophisticated systems powered by artificial intelligence (AI) to predict the prevalence of claims in a given customer's area and price accordingly. CEO Daniel Schreiber said, "Our integrated array of AI is able to predict churn, cross-sells, and claims with what we believe is unprecedented precision."
If that's true, what's taken so long? There are a few factors affecting its capabilities. One is just the amount of data. Lemonade is only eight years old. Every new customer and plan adds new data points to improve its machine learning, and older cohorts have more stable data and better loss ratios. Each new cross-sell and upgraded policy adds an element of "newness" that provides less-reliable data.
But with the new focus, the loss ratio decreased year over year as well as sequentially.
Image source: Lemonade. CAT = catastrophes.
The chart also shows the progress without CAT, or catastrophes, meaning that without some unusual variances, the loss ratio is even stronger, demonstrating the health of the model.
On the profitability front, there were improvements in both adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) and net loss. Management has guided for an EBITDA loss of $63 million to $65 million.
Image source: Lemonade. Adj. EBITDA = adjusted earnings before interest, taxes, depreciation, and amortization.
So what's not working?
The shift in strategy was meant to slow expansion while improving profitability. That would necessitate slowing expenses while building up the business. Management said, tongue-in-cheek, "Despite our reiterated intention to proactively slow growth until more of our price changes are approved, as our Q1 results and Q2 guidance demonstrate, we haven't mastered this maneuver quite yet."
That means it has increased its frequency in making regulatory rate filings, which insurance companies need to do in order to increase their prices. As Lemonade has more data and a better idea of the right price per policy, it has a higher frequency of price adjustments. The company has proactively tried to slow expansion while it awaits approvals, but it has become so popular that customers are signing up anyway.
Schreiber said that every dollar spent generated 12% more in sales than originally planned. However, because it's prior to the new rate approvals, these signups aren't as profitable as they would be six months from now.
Robust organic growth
How quickly is the company expanding? Customer count increased 23% over last year to nearly 1.9 million, and premium per customer grew 26% over last year. Gross earned premium rose 61% to $154 million, and revenue increased 115% to $95 million.
Revenue beat average analyst expectations of $88 million, and loss per share of $0.95 beat average analysts expectations of $1.13.
Management raised its full-year adjusted EBITDA outlook by 20% to a $200 million to $205 million loss, up from $240 million to $245 million.
NYSE: LMND
Key Data Points
There's finally momentum
There's obviously still a lot of work to do here to become net profitable. But Lemonade has finally demonstrated a real ability to progress and improve, and investors are getting a taste of a viable path forward.
At its new higher price, Lemonade stock is still quite cheap at 3.5 times trailing-12-month sales in comparison to where the shares used to trade. Investors who have some risk tolerance and a long-term horizon could consider buying shares.
