Lemonade (LMND 1.64%) was a hot IPO (initial public offering) stock when it entered the public market in June 2020. Shares soared 164% over the first six or so months of trading to reach a peak price in January 2021. However, it's been on a terrible downtrend since then. 

As of this writing, the stock is 76% below its IPO price. This means that a $1,000 investment back then would be worth just $240 now. Slowing growth, thanks to macro headwinds, coupled with shrinking valuations, have hurt investors. 

Let's take a closer look at this innovative insurance business. 

Impressive growth 

Lemonade uses artificial intelligence (AI) to offer various insurance products (renters, homeowners, car, pet, and life) directly to consumers, bypassing the traditional model of relying on physical locations and salesmen. The company touts its ability to use machine learning, data, and technology to upend one of the oldest industries around. Lemonade has a presence in the U.S., U.K., Germany, Netherlands, and France. 

"We use dozens of AI models to do pricing, underwriting, customer service, payments, and many other internal operations," co-founder and co-CEO Shai Wininger said on the Q1 2023 earnings call. While everyone is enamored with OpenAI's ChatGPT, Lemonade's entire founding back in 2015 was based on the use of AI. Talk about being ahead of the curve. 

Growth has been nothing short of spectacular. As of March 31, Lemonade counted 1.9 million active customers, a metric that keeps rising with each passing quarter. And in-force premiums soared 56% to $653 million. 

Revenue totaled $257 million in 2022, up 100% year over year. And in the first three months of this year, revenue jumped 115%. These figures are impressive in their own right, and they demonstrate an acceleration of top-line growth compared to the declines posted in early 2021. 

Because Lemonade leans heavily on its digital capabilities, it's perhaps not surprising that it has attracted a younger customer base. When it comes to consumers under the age of 35 looking for renters' insurance, Lemonade brings on the most customers. 

That could be a huge benefit over the long term. According to Lemonade's 2022 Investor Day presentation, 60% of customers at incumbent insurance providers have multiple products. For Lemonade, this figure is less than 4%. This presents a big opportunity to cross-sell, driving greater stickiness from policyholders, as well as improved marketing efficiencies over time. 

Where are the profits? 

When the macro situation was much more favorable, like before the Federal Reserve started rapidly increasing interest rates in 2022, investors were obviously in love with the stock. At its all-time high, shares were selling at a steep price-to-sales ratio of more than 105. 

But with a new economic reality setting in, investors appear to be more focused on businesses that can generate positive profits today, as opposed to some unknown date far into the future. That's probably why Lemonade, for all its disruptive potential, is currently trading 91% below its peak price. 

Investors might want to take advantage of the seemingly attractive valuation with the belief that there is significant upside should market and economic conditions normalize. But it's worth realizing that Lemonade isn't profitable. The business registered a net loss of $298 million in 2022, higher than the $241 million loss from 2021. And this happened during a time when revenue doubled. And during Q1, net losses totaled $66 million. 

Management thinks the company can get to profitability by the middle of 2026, but a lot of things need to happen for this outcome to be achieved. Notably, the gross loss ratio, which essentially measures the amount claims paid out as a percentage of premiums earned, needs to get below 70% from its current level of 87%.  

As you can see, there's a long road ahead for Lemonade to become a sustainable business from a financial perspective, and this means that it could be some time for that $1,000 IPO investment to break even.