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Lemonade: Foggy Profitability Prospects; Still Too Risky
Stock Analysis & Ideas

Lemonade: Foggy Profitability Prospects; Still Too Risky

Lemonade (LMND) is a company with an ambitious goal: To harness technology and social impact to be the most loved insurance company globally. The company is revolutionizing the insurance industry through its innovative business model.

This comprises leveraging technology, data, artificial intelligence, contemporary design, and behavioral economics to transform the end-to-end insurance process into being more enjoyable, affordable, accurate, and socially meaningful.

The company’s vertically-integrated approach, including utilizing wholly-owned insurance carriers, has attained solid traction since it launched in late 2016, with Lemonade expanding its written premium volumes rapidly.

However, investors have become increasingly more concerned regarding Lemonade’s bottom-line losses, which have been widening. Hence, the stock has been beaten down over the past couple of months along with most overvalued, money-burning companies. While Lemonade’s growth seems promising, I remain neutral on the stock due to the company’s overall uncertainty.

Stimulating Growth, but Concerning Losses

Lemonade’s Q3-2021 results came in quite strong, with premiums increasing 84% year-over-year and premiums per customer and total customers growing 26% and 45% versus the prior-year period, respectively.

The company also guided for an in-force premium expectation of $380 million to $384 million in its upcoming earnings, indicating that its strong growth will be sustained in the next quarter. Lemonade also achieved a record volume of cross-sales during the quarter that was four times bigger than the prior-year period.

Simultaneously, the company shared that the average premium per customer using more than one product was three times larger than the average premium per customer year-over-year. The way I see it, cross-selling will keep enriching Lemonade’s revenues as customers become more ingrained in Lemonade’s ecosystem.

That said, we can’t just skip the bottom line’s growing losses. Lemonade allocated $42.2 million during Q3 in marketing, which was more than its total revenues of $35.7 million, leading to a steep loss of $66.4 million. To put this in perspective, losses more than doubled year-over-year from $30.9 million in Q3 2020, which is utterly worrying.

For the time being, Lemonade finances its losses through the $640.3 million of proceeds gained through its IPO. With around $426.9 million of cash remaining on its balance sheet, even if losses were to stop widening at their current run-rate of $265.6 million, the company would have to start aggressively start issuing shares through 2022 to preserve healthy liquidity.

Therefore, current investors are more than likely to be extensively diluted considering that Lemonade’s expansion plans have only just begun, and the company will keep burning lots of cash on its forthcoming growth journey.

Wall Street’s Take

Turning to Wall Street, Lemonade has a Hold consensus rating, based on three Buys, one Hold, and two Sells assigned in the past three months. At $58.67, the average Lemonade price target implies 97.6% upside potential, nonetheless.

Conclusion 

Lemonade’s shares are trading at around 8x its expected Fiscal Year 2022 revenues following the stock’s decline lately, which may sound like an attractive multiple considering the company’s growth rates. However, with the company likely to dilute shareholders significantly through this year, this multiple could be quite deceptive.

Risks rounding Lemonade’s investment case remain since we can’t know when and if the company will ever turn to a positive bottom line. At the end of the day, Lemonade is still an insurance business that could be severely impacted by the same elements as its industry peers.

Hence, the company does not feature any meaningful competitive advantage that would place it in a special place other than its consumer-centric approach, which is admittedly compelling. For these reasons, I am staying away from the stock.

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