What happened

Shares of Lemonade (LMND 1.44%) stock gained 14% in May, according to data from S&P Global Market Intelligence. Investors greeted its first-quarter earnings report, released at the start of the month, with incredible enthusiasm.

So what

Lemonade got off to a great start when it launched on the stock market in 2020. Investors loved the concept of an insurance disruptor, and it's been demonstrating high-double-digit growth from the beginning, as well as a highly increasing customer count. 

It went through a long launch phase over about two years, when it rolled out a suite of insurance products. These include its original renter's product as well as homeowners, pet, life, and now auto insurance. Its strategy revolves around capturing younger customers with affordable products and then upselling and cross-selling as customers' insurance needs expand, so the large product collection is an integral part of how it sees its growth trajectory.

While all was going according to plan, losses were piling up. Investors soured particularly when Lemonade acquired Metromile insurance, which made it easy for Lemonade to quickly roll out its auto product, but landed it with even heavier losses. Investors were also disappointed in Lemonade's increasing, instead of decreasing, loss ratio, which meant it was paying out too much policy money in claims. The business of an insurance company is to underwrite policies effectively to match rate to risk, to ultimately make money.

Management wasn't sweating as it built up the business and committed to start slowing down growth spending and focus on improving profitability. It came through in the 2023 first quarter, with growth rates still high, but better profitability metrics. Gross loss ratio improved from 90% last year and 89% in the 2022 fourth quarter to 87%, gross profit increased 62% to $16.5 million, and net loss improved from $75 million last year to $66 million this year.

At the same time, gross earned premium, which is Lemonade's top-line metric, increased 61% over last year, customer count increased 23%, and premium per customer was up 26%.

Now what

Is this finally the turnaround investors have been waiting for? It's a strong show of progress, but Lemonade would need to show a few more quarters of sustained movement to demonstrate that it can operate a viable business.

Lemonade stock is now up 33% this year, although it's still down 13% over the past year. At this price, shares trade at 4 times trailing-12-month sales, which is reasonable for a high-growth stock getting closing to protifibility. However, it's still some way off from net profits. Right now, it's still a stock for the risk-tolerant investor.