Lemonade (NYSE: LMND) performed badly in the past year, losing more than 50% and heavily underperforming the Financial Select Sector SPDR® ETF (XLF), a benchmark for financial stocks.
The most recent quarterly report shows some improvements in the business, but the company is still lagging many competitors on crucial fronts. It could be that these weaknesses are not adequately priced in the stock, designing a risk for additional downturns to occur in the following weeks. Thus, I am neutral on this stock.
Based in New York, Lemonade is an insurance company offering several products covering tenants, owners of houses, and vehicles against the risk of damage, accidents, and other casualties.
Lemonade insures pets as well and operates as a life insurance company.
Currently, the company serves its clients in the United States and a few EU countries, including France, The Netherlands, and Germany. Thanks to the operation of internet bots and the adoption of artificial intelligence technologies, the company has reduced bureaucracy while streamlining its brokerage pipelines across the U.S. and Europe.
Q3 Earnings Results
Lemonade earned higher revenues in the third quarter of 2021 compared to last year’s same quarter, thanks to the improved gross earned premium, gains from investments, and higher commissions. In addition, the turnover was $35.7 million, a nearly 101% jump on a year-over-year basis, surpassing projections by $2.2 million.
The income statement account closed with a net loss of $1.08, a deterioration from the net loss of $0.57 for the same quarter of 2020, but it was better than the expectations for a net loss of $1.16.
The adjusted EBITDA loss also worsened to $51.3 million in the third quarter of 2021 versus $27.6 million in the third quarter of 2020, reflecting increased operating expenses. Looking ahead to Fiscal Year 2021, Lemonade forecasts a negative result of approximately $184 million for adjusted Ebitda, on total revenue of $126 million to $127 million.
The company had $1.1 billion in cash and short-term investments as of Sept. 30, 2021.
Underperforming Portfolio
Following the acquisition of pay-per-mile car insurance global provider Metromile (MILE), announced in November, Lemonade extends its presence in the car insurance sector. The market wasn’t happy with this move as the company wants to close the transaction by issuing new shares, which would reduce the ownership of each existing shareholder.
The company relies on technology to enhance the efficiency of its business, but operating expenses are still absorbing too many resources. In part, this was due to additional marketing costs through which the company attempts to attract more customers.
Although the number of customers and the premium per customer are growing, the improvement is still associated with high gross and net loss ratios.
Furthermore, due to the Covid-19 crisis, many tenants couldn’t pay rent due to job losses. This has increased the risk of loss resulting from damages that angry tenants may intentionally cause when vacating the properties.
Wall Street’s Take
In the past three months, seven Wall Street analysts have issued a 12-month price target for Lemonade.
The average Lemonade price target is $71.86, implying 50.2% upside potential. The company has a Hold consensus rating, based on three Buys, two Holds, and two Sells assigned.
Conclusion
I think this stock will continue to underperform the sector as it lags competitors on crucial metrics. Furthermore, the Covid-19 crisis doesn’t contribute to improving the picture. As a result, I wouldn’t acquire shares of this stock for the time being.
Disclosure: At the time of publication, Alberto Abaterusso did not have a position in any of the securities mentioned in this article.
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