Shares of Lemonade (LMND 1.64%) soured on Wednesday. The stock fell as much as 28.4% in the morning and stayed near this lower level throughout the day, showing extremely heavy trading volume. This harsh reaction to Lemonade's fourth-quarter earnings report wiped out a recent price spike as investors reset their expectations for Lemonade's near-term business prospects.
Why investors soured on Lemonade's sweet report
There wasn't anything wrong with the financials Lemonade reported yesterday. Lemonade's revenue rose by 31% year over year, landing at $115.5 million. Adjusted net losses shrank from $0.93 to $0.61 per diluted share. Your average analyst had expected a deeper loss of roughly $0.80 per share on revenue near $111.8 million.
The results also exceeded management's projections. From net losses and revenue to in-force insurance premiums and capital expenses, every metric with an official guidance range or target saw a more favorable result than expected.
But that didn't stop nervous investors from focusing on bearish details in this robust report. Revenue targets for the next quarter and for fiscal year 2024 came in below the current analyst consensus as management intentionally steps on the top-line growth brakes. Lemonade's insurance plans are underpriced in some markets due to insufficient training data for its artificial intelligence (AI) systems and challenging regulatory environments. So the company is taking its foot off the accelerator in those markets for a while, resulting in near-term revenue targets below the current Street view.
Lemonade is ripening over time
That being said, Lemonade's period of slower growth should be short. An effective insurance service always requires a large-scale operation, and massive amounts of real-world training data is a crucial ingredient in any AI-based business plan. Lemonade is just waiting for the regulatory wheels to grind out some premium rate boots and new service approvals over the next few months.
"As more rate updates come into effect, we'll have more products in more areas where we can accelerate our growth," co-CEO Shai Wininger said on the earnings call. "The tide has definitely turned. With every passing month, we are seeing more and more opportunities for profitable growth across our portfolio, including home and car, and we will be relaxing these growth constraints accordingly."
So the growth story continues, albeit more cautiously for a couple of quarters. Many investors in the insurance sector just move on to the next idea when they see negative earnings and cash flows. But today's price drop looks like a wide-open buying window, if you can work with Lemonade's long and slow progress toward more effective services and profitable operations.
