Lemonade (LMND 3.35%) attracted a lot of investor interest thanks to its artificial intelligence (AI)-driven insurance business. The company promised efficient underwriting and was an early adopter of chatbots to handle insurance buying and claims.
The company surged from its initial public offering (IPO) price of $29 to $69 per share on its first day of trading and rose as high as $188 in January 2021 amid investor euphoria. Although the company was achieving excellent customer and premium growth, it struggled with profitability and the shares soon plunged as investors fled from high-risk growth stocks amid rising interest rates and inflation.
Lemonade recently announced earnings and continues to show positive momentum on crucial profitability metrics. After years of negative investor sentiment, is the juice finally worth the squeeze on Lemonade?
NYSE: LMND
Key Data Points
Lemonade is growing rapidly, but losses have held it back
Lemonade hasn't lacked for growth. At the end of Q2, its customer count was nearly 2.2 million, a 14% increase from last year. Over two years, its customer count has increased by 37%.
While its growth has been solid, it's come at the cost of higher expenses and claims costs. Lemonade has pushed into multiple insurance markets during the past several years, including homeowners, pet, and automotive insurance. As a result, the company has undergone growing pains as it dials in its risk pricing models.
In the insurance industry, the best companies have excellent underwriting models that balance the rewards of insuring certain risks and price them appropriately. One metric where we can see Lemonade's progress is its net loss ratio, or the percentage of its earned premiums that go toward paying claims costs.
Lemonade's management has set a loss-ratio goal of 75% and has been quite far off this goal for the past several years. During the past two years, Lemonade's net loss ratio has been 97% and 89%, which has been a point of concern among investors.
Things have improved recently for Lemonade. Its net loss ratio has remained steady during the past three quarters, reaching 79% in Q2. This is slightly above management's goal but shows that the company has progressed after years of elevated loss ratios. This trend shows that the company continues to tweak its underwriting model and premiums charged, and this is precisely what investors want to see.
It also continues to increase its customer base and premium per customer, which is important as it cross-sells its newer offerings to existing customers. In Q2, the premium per customer was $387, a 7.5% increase from last year. However, you should note that Lemonade continued to lose money and posted a $57 million net loss in the quarter, an improvement from its $67 million loss one year earlier.
Should you buy Lemonade?
Analysts project that Lemonade's revenue could rise to $514 million this year and $654 million in 2025, while the loss per share will narrow from $3.02 to $2.48 in the next year. As a result, the stock is priced at 1.72 times one-year forward sales and 2.36 times this year's sales, which is on the low end since its 2020 IPO.
LMND PS Ratio data by YCharts
I've been cautious about Lemonade for quite a while due to its higher loss ratio. Three consecutive quarters of sub-80% loss ratios is a positive trend, and investors want to see this continue to confirm Lemonade's recent success is sustainable and not just a run of good luck.
Investors with higher risk tolerance may want to consider starting a small position today based on its cheaper valuation. However, more conservative investors should wait to confirm further loss ratio and net loss improvements in the next few quarters, which could be the turning point that long-term investors are looking for.
