What happened
Lemonade (LMND +3.59%) saw its share price fall 11.1% this week, as of Friday morning at 9:30 a.m. ET, according to S&P Global Market Intelligence. It had been down as much as 16% during the week. Lemonade was trading at about $17.50 per share at the market open on Friday, up approximately 28% year to date.
It was not a great week for the markets overall, as the S&P 500 was down 0.6%, the Dow Jones Industrial Average fell 1%, and the Nasdaq Composite dropped 0.4% this week as of Friday at the opening bell.
So what
Lemonade is an insurance company that uses artificial intelligence and machine learning to process claims. It has been growing rapidly, but as a relative newcomer that launched in 2016, it has yet to turn a profit.
In the first quarter, Lemonade's growth numbers were strong once again. In-force premiums rose 56% year over year to $653 million, with premium per customer up 26% to $352. Gross earned premium was up 61% to $154 million, while gross profit jumped 62% to $16.5 million. Further, the number of customers climbed 23% to 1.86 million.
NYSE: LMND
Key Data Points
Revenue was up 115% year over year to $95 million in the quarter, but the company still operates at a net loss, as expenses for the start-up remain high. In Q1, it had a net loss of $65.8 million, or negative $0.95 per share, which was slightly improved from a net loss of $74.1 million, or negative $1.21 per share, in the first quarter of 2022.
It is the question of profitability that caused the stock price to plummet this week, after a major Wall Street firm gave Lemonade an underweight rating. Morgan Stanley analyst Bob Huang said in a research note earlier this week that the path to profitability remains challenging for Lemonade.
With an enterprise value-to-revenue multiple of 3, the analyst said the stock is expensive and investors can find better risk/reward trade-offs elsewhere. However, it should be noted that enterprise value-to-revenue -- a measure of a stock's valuation -- is down from where it was at the end of the quarter, when it was 7, and way down from a year ago, when it was 31. Huang set a price target of $14, which would be down about 20% from Lemonade's current price level.
Now what
Lemonade's second-quarter guidance anticipates an in-force premium of $665 million-$668 million, gross earned premium of $156 million-$158 million, and revenue of $96 million-$98 million. The adjusted EBITDA loss is expected to be between $58 million-$55 million, which is slightly more than the $51 million loss in Q1. For the full year, Lemonade expects revenue of $392 million-$396 million and an adjusted EBITDA loss of $205 million-$200 million.
The analyst raises some valid concerns about Lemonade's expenses, competition, and lack of profitability. But the company has been an incredible grower, and technology and artificial intelligence appear to stand out. I'm not sold on it yet, for the reasons cited above, but I'll continue to watch Lemonade on its path to profitability.
