Artificial intelligence (AI) captured investors' attention early last year when OpenAI's ChatGPT online chatbot showed the world it could answer complex questions and even write computer code.
However, Lemonade (LMND +0.22%) has used AI to transform the insurance industry since it was founded in 2015. There is no shortage of AI companies at the moment, but Lemonade is one of just a few successfully monetizing AI as a core part of its business.
Its stock is trading 89% below its all-time high, which was set during the tech frenzy in 2021, when investors assigned it an irrational valuation. But that steep drop has created an opportunity, because its underlying business continues to go from strength to strength. Here's why Lemonade stock is a buy now.
NYSE: LMND
Key Data Points
Lemonade is transforming insurance using AI
Traditional insurers typically rely on human-led processes, which means making a claim can involve numerous phone calls and lengthy waiting periods. Lemonade customers, however, can have their claims paid out in as little as three minutes thanks to the company's automated process led by AI Jim.
New customers, on the other hand, can interact with Maya, an AI chatbot on the Lemonade website that writes quotes in less than 90 seconds.
Lemonade serves more than 2 million customers across five markets: renters, homeowners, life, pet, and car insurance. The company's premium per customer has steadily increased each quarter, and it came in at a record-high of $369 at the end of 2023. It's a natural consequence of Lemonade expanding its product portfolio, because customers who enjoy their experience with the insurer are likely to buy multiple policies.
But AI also plays a crucial role in calculating premiums for customers. The more accurately an insurer can price policies, the more likely it is that customers are paying a fair sum for the risk they pose. Lemonade rolled out its latest Lifetime Value 9 (LTV 9) model during the fourth quarter of 2023, which uses 50 machine-learning models to determine the lifetime value of each customer.
Earlier iterations of the LTV model calculated how likely a customer was to make a claim, switch insurers, and buy multiple policies, which are key inputs into the premium they should pay. LTV 9 improves on its predecessors with additional data, and it also helps Lemonade increase operational efficiency by dictating which products and which geographies receive the most marketing dollars.
With the help of AI, Lemonade knows instantly if a market is underperforming or overperforming, so it can rapidly adjust where it allocates money.
Image source: Getty Images.
Lemonade delivered a record amount of revenue in 2023
Lemonade's revenue came in at a record high of $429.8 million in 2023, a 67% increase from 2022. It was also $50 million above what the company expected at the beginning of the year, but that wasn't the only noteworthy excerpt from its latest financial report.
Its in-force premium -- the total value of all active policies -- was a record $747 million at the end of 2023, representing a 20% increase from 2022. In the fourth quarter, the company's gross loss ratio also dipped 12 percentage points year over year to 77%. That represents the percentage of the in-force premium paid out as claims, and since Lemonade's long-term target is 75%, the fourth-quarter result was a huge step in the right direction.
The company also focused on progressing toward profitability throughout 2023 after years of investing heavily in growth initiatives. In the fourth quarter, it had a net loss of $42.4 million under generally accepted accounting principles (GAAP), which was the smallest quarterly loss in all of 2023, and it was also a 33% reduction from its year-ago result.
Management expects to burn less cash in 2024, which will accelerate its path to profitability, thanks in part to a shift in strategy that involves outsourcing some of its customer acquisition costs. Lemonade created a concept called "synthetic agents" in partnership with one of its early investors, General Catalyst (GC).
GC will effectively fund 80% of Lemonade's customer acquisition costs in 2024 in exchange for a 16% commission from the premiums each of those customers contributes. Those commissions will be paid over a period of two or three years, at which point they will terminate, and Lemonade will own the customers' entire premiums.
In essence, this helps Lemonade close the cash-flow gap created when it invests money to acquire customers and waits to recoup that money through premiums over time.
Why Lemonade stock is a buy on the dip
Lemonade has a growing customer base, rising revenue, shrinking losses, and a clear strategy to continue making progress on all of those metrics with the help of AI. Therefore, the 89% drop in its stock from its all-time high might prove to be a great entry point, especially when investors look back on this moment a few years from now.
Based on the company's $429.8 million in 2023 revenue and its current market capitalization of $1.2 billion, its stock trades at a price-to-sales (P/S) ratio of just 2.7. That's near the cheapest level since it went public in 2020.
LMND PS ratio data by YCharts.
The business's addressable market is enormous considering the U.S. car insurance industry alone was worth $353 billion last year. Investors looking to own a slice of an AI company that is turning the technology into tangible financial results with loads of potential should definitely consider owning Lemonade.
