There can be no doubt now that artificial intelligence is revolutionizing our world. Indeed, some experts believe that the impact AI will have on society makes it the most important event in human history. From medicine to warfare, cyber-security to robotics, artificial intelligence is already changing the way we live.
But what’s really fascinating about this new technology is just how pervasive and ubiquitous AI is likely to become. Even now, artificial intelligence is being used in areas for such things as shopping and transportation. So it might not be such a shock to discover that AI has also made its way into that most traditional and, dare we say it, stultifying business known as the insurance industry.
In fact, AI is rapidly shaking up this lumbering sector – and at the forefront of this change is Lemonade (NYSE:LMND), a dynamic, exciting financial technology start-up that customers can’t seem to get enough of.
With Lemonade’s most recent quarterly results having just dropped, we’ll take a closer look at this company to see where its value lies for potential investors – and whether the threat to legacy institutions from this game changing business is all it’s made out to be.
Lemonade’s Underwhelming Price Action
Let’s begin our analysis of Lemonade (LMND) by facing up to the elephant in the room: 2021 was not a good year for the New York-based insurance company, as shareholders witnessed the price of their investment tumble 67% over the last twelve months.
In fact, the situation is even more bleak if you consider that the firm was trading at $183 per share at its peak, meaning that the business is currently worth just 21% of its all-time high valuation at under $40 at the time of research.
While, on the face of it, this state of affairs isn’t exactly encouraging, it does force us to consider whether Lemonade’s present price woes are justified, and, if not, does the stock represent a buying opportunity at this attractively undervalued entry point?
Lemonade’s Strong Point
One aspect of LMND’s business that suggests the firm has significant upside potential is its amazing ability to keep on growing its customer base, with the company seeing a 45% year-on-year increase in total customers of 1.36 million in the third quarter of 2021.
Not only that, the firm also grew its premium per customer by 26% at $254, and its in force premium spiked a massive 84% to come in at $347 million.
Furthermore, Lemonade’s gross earned premium rose 86% year-on-year, from just $43 million during Q3 2020, to $80 million this time around.
Gross earned premium is an important metric for insurers because it signifies the total amount of premiums paid for by policy holders once the coverage period expires i.e. when the company can record the revenues from the policy as a profit. The fact that LMND is growing this number so handsomely is good news for investors.
One key long-term strategy for Lemonade has been to diversify its business mix so as not to be as reliant on its renters segment for revenue growth.
This quarter saw more improvement here too, with its non-renters share of its overall book increasing from 44% to 47%.
LMND’s pet line business is also up to 15% of the total share, while its homeowners’ wing remains at a constant 30%.
Why Did Lemonade Stock Fall So Much?
If Lemonade’s customer count is going up and its revenues are soaring, why on earth did its share price deteriorate so badly during 2021?
To answer this, first we have to appreciate the high expectations that Wall Street has for Lemonade’s future revenue growth. For instance, for the fiscal period ending December 2022, analysts expect LMND’s year-on-year top-line increase to hit 70%, and for the period after that ending December 2023 to be not much less at 53%.
And it doesn’t stop there; for 2024, 2025 and 2026, revenues are slated to grow at 65%, 36% and 28% respectively. Not that it needs saying, but these numbers are staggering.
So, why is this a problem?
Well, it’s a problem because, despite Lemonade’s great revenue metrics, the company still looks to be a long way from turning a profit. The firm’s latest EPS was a loss making -$1.08, and the business has never once had a positive cash flow per share for the entirety of its operations.
One explanation for LMND’s poor bottom-line can be found in its gross loss ratio, which, at 77% during Q3 2021, is five percentage points worse than it was a year ago.
The gross loss ratio gives an indication of how profitable an insurer’s policies are – and the fact that Lemonade isn’t improving this vital indicator of performance should be worrying.
Is Lemonade The Best AI Stock To Buy?
Lemonade might only have floated as a public company in July 2020, but its stock has never been as cheap as it today. On paper at least, this makes LMND a growth-like business trading at a value-like price. But is Lemonade’s low share price an invitation to buy – or a warning that something’s fundamentally wrong with the company?
At its highest point, LMND’s share price once exceeded its sales revenue by more than 100 times. This ratio has come down a lot since, and now trades at a forward price-to-sales multiple of just 19 – not at all bad for a high-growth fintech outfit such as it is.
However, for any company to lose almost 80% of its value over a calendar year – especially when wider market conditions weren’t anywhere near as bad – should always be a red flag for investors.
That said, Lemonade isn’t just any old company – and there’s still plenty of mileage left in the business yet. The firm is spending heavily in technology and marketing at the moment, which partially explains its high gross loss ratio mentioned earlier – and, as growth investors know too well, expansion costs for growing companies do not come cheap.
Whether you decide to buy Lemonade stock right now really comes down to whether you believe it’s hit its lowest point yet? If you believe it has, then it’s likely all upside from here on out. If not, then, for the time being at least, it’s a case of Lemonade, but without the fizz.
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