After years of disappointing investors, Lemonade (LMND +0.66%) finally posted an accolade-worthy earnings report last month. The stock price, which had been sinking lower and lower, has made a comeback and is up 49% this year.
But one great quarter doesn't equal a high-quality stock. Where is Lemonade going, and what should investors expect in one year?
Yes, Lemonade is really different
Lemonade touts itself as being a visionary business with a differentiated insurance model. The foundation of that difference is that it was built around artificial intelligence (AI) on a digital platform, which gives it key advantages.
Naysayers point out that any insurance company can switch to digital operations, and indeed, they are. But moving huge, decades-old, and even centuries-old, companies onto a digital plane isn't quite so simple. Ajit Jain, who runs Berkshire Hathaway's insurance companies, said :
Even though we have made improvements in terms of bridging the gap on telematics, we still haven't started to realize the true benefit. And the real culprit of the bottleneck is technology. GEICO's technology needs a lot more work than I thought it did.
He went onto explain that GEICO has 500 to 600 legacy systems that don't talk to each other, and the company was trying to get that to 15 or 16 systems that do talk to each other.
Lemonade's AI bots take care of a high percentage of both sign-ups and claims and can provide results in as little as one second. This has led to an incredible number of customers, more than 1.8 million as of the end of the first quarter, which was 23% more than last year.
The company is done with its product rollout for the time being. Chief Executive Officer Daniel Schreiber explained that having a large suite of products was integral to the company's vision to be a viable company, since policy bundles are a crucial element of top-line growth. Lemonade's strategy relies heavily on cross-sells and upsells as customers' needs grow, and satisfied customers are likely to stick with the company.
A year from now, there are likely to be more customers and more policies per customer.
The path to profitability exists
What excited investors most about Lemonade's first-quarter report were the improvements in its profitability and loss ratio.
The unprofitable loss ratio was most concerning until now. When Lemonade first sold shares to the public almost three years ago, the loss ratio was narrowing, which was a great sign of progress. The loss ratio measures how much an insurance company pays out as claims, and the lower, the better. But a few catastrophes combined with the young company's high operating costs in new markets eventually contributed to a widening loss ratio, which shot up to 121% in one quarter. The 2023 first quarter demonstrated a decline both year over year and sequentially to 87%. Without any catastrophes, the loss was 72%, well within management's target range.
Management has long maintained that the challenges with lowering the loss ratio were not about any holes in Lemonade's business model, but that they were due to a growing company launching new products. Loss ratios are higher for new products and new markets, and management wasn't fazed by the initial growing pains.
As for profits, Lemonade is still posting significant net losses, but they're improving. Gross profit increased 62% over last year while expenses only increased 4%, and the net loss of $0.95 was better than $1.21 last year.
Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) came in at a $51 million loss, better than $57 million last year. Management raised its full-year forecast for adjusted EBITDA from a loss between $240 million and $245 million to a range of $200 million to $205 million.
Image source: Lemonade.
These numbers don't suggest net profitability any time soon, but they're numbers that investors can live with for a growth company.
Schreiber also pointed out that even though Lemonade pressed the pause button on spending for growth, it grew faster than intended. In a year, it's likely to keep growing the top line while improving the bottom line.
Lemonade stock could keep climbing
Lemonade stock may be up this year, but investors are taking a measured stance, which is the right approach. The shares trade at a little more than 4 times trailing-12-month sales, which is cheap for a company that's growing as fast as Lemonade. That means this is still a good entry point for new investors. However, since it's still far from profitability and has yet to demonstrate sustained levels of a lower loss ratio, it's still only a buy for risk-tolerant investors.
