The Bull Case for Lemonade Stock

The insurance business is the latest industry to be targeted by new Insurtech start-ups seeking to throw out old technologies and replace them with innovative telematics data and machine learning algorithms.

Lemonade (LMND) is one such disruptor.

Armed with an automated, AI-powered digital-first platform, the company enjoyed rapid growth after its initial public offering last year, but has since seen its share price drop as investors rotated out of tech stocks recently.

However, with a revenue beat in its latest earnings report, it looks as if the tide might have turned for the New York-based insurer.

We’ll examine the bull case for Lemonade, and what the company can offer to potential investors.

Lemonade Q2 Earnings Call Highlights

Lemonade (LMND) had an outstanding quarter, with exceptional growth across all key metrics.

The company scored a second successive quarter of In Force Premium (IFP) growth, with a year-on-year increase of 91% bringing in $296.8 million of cash. Its customer base of 1.2 million was up 48%, and its Gross Earned Premium spiked a massive 90% to $67 million.

The only negative number coming out of Lemonade’s Q2 filing was its Gross Loss Ratio going up 7% year-on-year from 67% to 74%. However, this was down sequentially from Q1 2021, and much of that loss came from the company’s efforts to expand its business lines and the costs associated with that endeavor.

Crucially, Lemonade’s Premium per Customer figure also rose 29% this quarter, to $246. The Premium per Customer number is an important value in the insurance industry, and in Lemonade’s case it tells us a lot about the health of the company’s current business.

The metric itself is heavily indicative of the total number of policies that a given customer has, and also whether those policies are generating higher premiums or not. Likewise, the Premium per customer number reflects how the average worth of each policy is growing.

As Lemonade’s customer base grows, the company is also engaged in diversifying its product mix, encouraging existing policy holders to invest into other product verticals.

The ability to grow and expand these addressable markets presents the opportunity to cross-sell higher premium products too. Furthermore, about 50% of all of Lemonade’s new business in the second quarter came from renters, down from roughly 75% in the same quarter last year.

This shift is encouraging as it means first-time Lemonade customers are going straight for the more profitable policies that the firm offers, reflecting an overall positive evolution for its business.

Interestingly, at the close of Q2 2020, the only policies that Lemonade sold were renters and homeowners products, with renters accounting for 75% of the company’s IFP. However, at the end of Q2 2021, renters made up just 56% of the firm’s IFP mix, with the remaining 44% split between homeowners, life and pet policies instead.

Growing Footprint

Lemonade has been improving its geographical mix too, with the company offering at least one product for sale in every US state.

It’s also been extending its reach across the continents, and now has a meaningful presence in France, Germany, and the Netherlands.

Indeed, the firm has won awards from Dutch rating company MoneyView Research and the consumer protection organization Consumentenbond, as well as from German financial review outlet Focus Money.

On the home front, Lemonade recently rolled out its renters product in Florida, the fourth largest renters insurance market in the country. Florida will provide a good testing ground to assess the resiliency of Lemonade’s premium pricing algorithms as the state is a high risk Catastrophe Bond zone.

The company has already weathered a Black Swan event in the form of the ‘Texas Freeze’ winter storm that temporarily hit the firm’s gross loss ratio, and the hopes are that the business learned lessons from that event and incorporated the insights gleaned into its platform technology.

Lemonade Car: No News Is Bad News?

Investors and analysts had been expecting a concrete start date for the launch of its much vaunted Lemonade Car product, but management deflated those hopes by holding off on such commitments, instead reiterating the progress made on the product roadmap and the work done with customers in fine-tuning its technology.

Given the vagaries of the regulatory process and the needs to on-board further staff, the company withheld on giving any specific time frame guidance this quarter.

Shareholders might appreciate the cautious and thorough approach that Lemonade is taking with what will likely turn out to be a flagship product, but they’ll surely worry that the company also declined to give any sign on expected IFP for its auto insurance product for the rest of FY 2021.

In fact, investors were so spooked by this that post-quarter trading saw the firm’s share price drop by 9%. 

Regardless of how the market reacts in the short-term, Lemonade is right to ensure it gets this launch off to a good start. Lemonade Car’s market opportunity is huge, with a potential $300 billion of revenue up for grabs. A slight delay now will mean little if the firm gets this right in the long-term. 

Risks To Buying Lemonade

For all its growth potential, Lemonade is still a speculative play on a fragile ‘disruptive’ business – and one that is taking on a well-entrenched legacy industry resistant to change. Not only that, but the firm isn’t the only company trying to re-imagine the insurance game either. 

In its financial literature, Lemonade cites traditional insurance brands such as Travelers and Allstate as its competition. But it overlooks other Insurtech rivals that are challenging for the same turf.

There are private companies focused on the same kind of work that Lemonade is doing – namely Kin Insurance and Ethos Life – that will squeeze Lemonade’s dominance in the field.

Ethos Life, for instance, has been perfecting its ‘deep technology and data science’ algorithms over 5 years to create a similar ‘mobile-first’ platform like Lemonade that can screen customers for life insurance without even needing to undergo a medical examination first.

Likewise, Kin Insurance uses data-driven models to provide a pure-play platform that focuses on older customers seeking home insurance policies.

The presence of specialist companies like Kin and Ethos severely limit the ability of Lemonade to capture these niche markets all for itself. If the space becomes more crowded – as it surely will – those growth possibilities that seem so expansive now won’t appear as attractive further down the line.

The Bull Case For Lemonade: Final Thoughts

Lemonade trades at an inflated valuation at the moment, and it’s not clear whether the business justifies such a rich price.

Its forward revenue growth of 45% is about in-line for such a young enterprise, but with a trailing twelve month price-to-sales ratio of 52, some investors might rightly feel put off. 

However, Lemonade has a good cash position of $1.2 billion, and can fuel the aggressive expansion plans it already has in place. Furthermore, the company’s full year guidance predicts an IFP at December 31, 2021 of between $380 – $384 million.

Given the stock’s depressed share price and its explosive potential, now would be a great time to open a position in Lemonade, and benefit from a tech revolution in the insurance space that seems almost unstoppable.

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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.