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Lemonade: Widening Losses Could Be Concerning

Lemonade’s (LMND) mission is simple: Harness technology and social impact to be the world’s most loved insurance company. The company is disrupting the insurance industry through its innovative business model.

This includes leveraging technology, data, artificial intelligence, contemporary design, and behavioral economics to make the end-to-end insurance process more delightful, more affordable, more precise, and more socially impactful.

Lemonade’s vertically-integrated strategy, including operating wholly-owned insurance carriers, has gained significant traction since it launched in late 2016, with the company growing its written premiums rapidly.

That said, investors have become increasingly worried lately as Lemonade’s bottom-line losses have been widening. I am neutral on the stock. (See Analysts’ Top Stocks on TipRanks)

Q3 – Exciting Growth, but Worrying Losses

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

The company also shared in-force premium guidance of $380 million to $384 million for the next quarter, suggesting that its substantial growth will endure in Q4. Lemonade stated the company achieved a record volume of cross-sales in Q3, which was four times larger than the comparable period last year.

At the same time, it also reported that the average premium per customer using multiple products came in three times higher than the average premium per customer compared to last year. In my view, cross-selling will continue to enhance Lemonade’s sales as customers become more invested in Lemonade’s ecosystem.

However, we can’t ignore Lemonade’s growing losses. The company spent $42.2 million during the quarter in marketing, which was higher than its total revenues of $35.7 million, resulting in a considerable loss of $66.4 million. In fact, losses more than doubled year-over-year from $30.9 million in Q3 2020.

The company currently funds its losses through the $640.3 million of proceeds from its IPO. With $426.9 million of cash left on its balance sheet, even if losses were to stop stretching at their current run-rate of $265.6 million, Lemonade would have to start aggressively issuing shares beginning next year to maintain healthy liquidity.

Hence, existing investors are likely to be considerably diluted since Lemonade’s growth plans have only just started, and the company will continue burning tons of cash on its upcoming growth journey. The stock is trading at around 15 times its projected Fiscal Year 2022 revenues, so share issuance me still be occurring at a premium despite the recent decline in share price. Thus, dilution may not end up being so severe.

Nonetheless, risks remain since we don’t know when and if the company will ever become profitable. After all, at the core of its financials, Lemonade is still an insurance business, which could be adversely impacted by the same factors as its industry peers.

Overall, while I appreciate Lemonade’s growth and its platform’s innovative features, it’s hard to predict whether the company’s aggressive marketing strategy will pay off in the end. Losses may continue being too harmful to investors until Lemonade shows a positive bottom line.

Furthermore, we can’t be sure if the company will continue growing satisfactorily if its excessive marketing spend were to ease. Hence, I am neutral on the stock for now.

Wall Street’s Take

Turning to Wall Street, Lemonade has a Hold consensus rating, based on three Buys, two Holds, and two Sells assigned in the past three months. At $71.86, the average Lemonade price target implies 36.5% upside potential.

Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates  Read full disclaimer >