Is The Fizz Back In Lemonade Stock?

After much fanfare a few years ago, Lemonade, an online insurance provider, took a tumble that led to a share price plunge.

The three year picture for Lemonade (NYSE:LMND) looks very different from the one year view. Down 75.0% over the longer time horizon contrasts sharply with the year-to-date gain of 26.5%.

Now that the stock is showing signs of promise again, is it too late to buy it or is this just the start of a bull run?

Why Lemonade Got So Much Buzz And Then Fizzled?

When Lemonade first went public and soared all the way to $163 per share, the excitement among investors was palpable. The company had, after all, launched a highly innovative business model that leveraged artificial intelligence and behavioral economics to differentiate it from legacy insurers.

By using AI for claims processing and even customer communications, Lemonade could reduce its operational costs, boost margins, and increase profitability, at least that is how the story was spun. 

On the face of it, the narrative made sense because a technology-first approach to insurance had the potential to be scalable and more profitable in the long run.

Further supporting the bullish investment thesis was the audience focus Lemonade had, which featured a younger and tech-savvy demographic.

Management targeted millennials who were wowed by the low prices and simple, low-friction user experience. No longer was an hour long phone conversation needed to get a quote but Lemonade made it possible to facilitate a digital-first onboarding process that was quick and seamless.

The product launch and market fit was clearly evident early on with renters insurance the flagship offering. Thereafter, Lemonade expanded its offerings to include everything from pet insurance to lift insurance.

The variety of products enabled the company to cross-sell existing customers of one product on another, thereby increasing revenue per customer and ultimately the all-important customer lifetime value.

With so much home-grown success, Lemonade expanded abroad, targeting European countries like Germany and the Netherlands in fast order. By so doing, management made it clear that its international ambitions are huge and it aims to attract a vast customer base over time across numerous geographies in order to diversify revenues and mitigate location-specific risk.

The bullish thesis is so compelling that you might wonder why Lemonade fizzled. And to answer that you don’t need to look much beyond the financials.

When Lemonade’s Top Line Crashed 

Soon after Lemonade went public, year-over-year revenue growth rates plunged from 142.9% in Q2 2020 to -8.7% in Q2 2021 with each quarter successively worse than the prior one. 

It appeared that the growth story and narrative of disruptive innovation was all hype. And then something interesting happened. That Q2 2021 quarter marked the low in YoY revenue growth rates.

Seemingly in no time the top line was scorching higher, so much so that in the past six quarters not one has been reported with top line growth under 90%, an astonishing feat.

Clearly, Lemonade’s AI is resonating with its audience. Its claims-processing bot known as AI Jim has reportedly done a stellar job settling claims swiftly and that efficiency has translated to higher customer satisfaction.

What’s not improving, though the market currently seems to be overlooking it, is operating income losses that have grown from $122 million in Q1 2020 to $258 million last quarter.

The positive revenue run rate has impressed analysts, two of whom have revised earnings higher for the upcoming period.

How Do Analysts Rate Lemonade?

Overall, analysts are not overly optimistic about the firm’s prospects. So, how would they answer the question, is Lemonade stock undervalued?

According to 8 analysts, Lemonade stock is undervalued by 10% with fair value sitting at $18.63 per share. That tends to align well with a discounted cash flow forecast analysis which pegs intrinsic value at $18.89 per share.

Some general metrics are not looking so rosy, though. For example, Lemonade operates with a poor return on assets and has not been profitable over the past twelve months. As a result, a price-to-earnings ratio comparison is not applicable, given that it is negative.

The price-to-sales ratio for the past twelve months sits at 2.8x, a reasonable valuation for a high growth firm, particularly one that’s hitting triple digit percentage levels.

Impressively, Lemonade continues to report a pristine balance sheet that has no debt burden and has $282.5 million in cash reserves.

So what does it all boil down to?

Is Lemonade Stock a Buy?

When LMND share price was hovering around $10 per share in April and October of this year, its stock was certainly a value buy. After a spike of around 60% in price since then, it’s hard to justify the valuation is compelling.

Nonetheless, analysts do see a further 10% gain on the horizon and a DCF analysis confirms that assessment. Certainly, the P/S ratio of 2.8 would suggest the stock is a good deal at this price, particularly given the astonishing 100% annual growth rate, or thereabouts.

To be clear on why this is the case just look out in time and see that two more years of an equivalent growth rate would translate to a P/S ratio of under 1, a veritable steal.

Unless growth slows materially, it’s a reasonable bet that Lemonade share price will be considerably higher in the medium term. In the near-term share price volatility has been sufficiently great to keep all but the most risk-seeking investors away. 

If management can figure out how to keep costs under control to the point that profitability can be reasonably forecast, expect Lemonade share price to really start galloping higher, even if the old highs from a couple of years ago are out of reach, for now.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.