Many investors have soured on Lemonade (LMND +3.01%) over the past four years. The online insurer went public at $29 in July 2020, skyrocketed to an all-time high of $183.26 on Jan. 11, 2021, but now trades at about $16.
Lemonade initially impressed investors with the disruptive potential of its artificial intelligence (AI)-driven chatbot and algorithms, which simplified the process of buying insurance plans for first-time buyers. However, the bulls retreated as its growth cooled off, it racked up more losses, and rising interest rates popped its bubbly valuation. Should contrarian investors still bet on Lemonade as a turnaround play? Let's review the bullish and bearish cases for this company.
Image source: Getty Images.
Lemonade's key growth rates
Lemonade's AI chatbots made it a popular option for younger insurance buyers. At its IPO, approximately 70% of its customers were under age 35. It initially only provided homeowners and renters insurance, but it subsequently expanded into the term life, pet health, and auto insurance markets. Like many other insurance companies, Lemonade offers discounts for customers who bundle their plans.
Lemonade mainly gauges its growth in terms of total customers, in-force premiums (IFP), and gross earned premiums (GEP). However, the growth of all three key metrics decelerated after its public debut. Its adjusted gross margin also contracted as its gross loss ratios stayed well above the ideal range of 40%-60% for most insurance companies.
|
Metric |
2020 |
2021 |
2022 |
2023 |
|---|---|---|---|---|
|
Customer growth |
56% |
43% |
27% |
12% |
|
IFP growth |
87% |
78% |
64% |
20% |
|
GEP growth |
110% |
84% |
68% |
37% |
|
Adjusted gross margin |
33% |
36% |
25% |
23% |
|
Gross loss ratio |
71% |
90% |
90% |
85% |
Data source: Lemonade.
Lemonade's top-line growth slowed even as it rolled out new insurance products and acquired Metromile in 2022 to accelerate the expansion of Lemonade Auto. The company expects its revenue to only rise by 20% in 2024, compared to a 67% jump in 2023. It also believes it will stay unprofitable for the foreseeable future.
Reasons to sell Lemonade's stock
The bears think that if you look past all the AI hype, Lemonade is just a tiny insurance company that lacks the scale to keep up with its larger competitors. It only served 2.1 million customers in the first quarter of 2024, while Allstate (ALL +1.94%) serves over 16 million customers and State Farm has more than 85 million in-force policies.
Insurance is a mature industry that favors market leaders with economies of scale. Since Lemonade lacks those qualities, it could continue to rack up steep losses as it desperately rolls out new insurance products and ramps up its marketing efforts.
The bears will also point out that Allstate, State Farm, and many other established insurance companies have already launched their own AI chatbots and AI-powered tools to streamline their onboarding process and claims. Those new services could lure customers away from Lemonade as its top-line growth slows.
Finally, the bears will tell you that Lemonade lacks a meaningful path toward profitability. It expects its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss to narrow from $178 million in 2023 to a loss of $151 million-$155 million in 2024, but it's still a long way from breaking even.
NYSE: LMND
Key Data Points
Reasons to buy or hold Lemonade's stock
The bulls will tell you to stick with Lemonade because it looks cheap at 2 times this year's sales. Its insiders have also bought more than nine-times as many shares as they sold over the past 12 months, suggesting they believe its stock could be bottoming.
Lemonade also ended its latest quarter with $927 million in cash, cash equivalents, and marketable securities, so it won't go bankrupt anytime soon. It expects to achieve break-even cash flow by the end of 2024 as it continues to automate more of its processes. That stabilization, along with its low enterprise value of $925 million, might make Lemonade a compelling takeover target for a larger insurance or fintech company.
Which argument makes more sense?
Lemonade's business isn't headed off a cliff yet, but it will likely remain a divisive stock. Its AI-driven features are innovative, but they won't help it stay competitive in a market that favors scale and low prices. Its moat is narrow, its growth is slowing, and it's still racking up steep losses. Lemonade's stock might seem undervalued, but I believe it will continue to trade at that discount until the company finally stabilizes its sales growth and right-sizes its business.
