Is the lemonade stock a buy?

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Lemonade (NYSE: LMND) the stock fell on Aug. 5 after the online insurer released its second quarter earnings report. Revenue fell 6% year-over-year to $ 28.2 million, but it is higher than analysts’ estimates. The net loss fell from $ 21.0 million to $ 55.6 million, or $ 0.90 per share, which still matched Wall Street’s expectations.

The company’s growth rates may seem dismal for a stock that is trading nearly 40 times this year’s expected sales, but those numbers only tell part of the story, as its one-year comparisons on the other were skewed by a big change in its business last year. . Let’s assess this change, take a look at the key metrics investors should focus on, and see if Lemonade stock is worth buying after its 11% drop after earnings.

Image source: Getty Images.

Beyond Lemonade Revenue

In the third quarter of 2020, Lemonade launched proportional reinsurance agreements with several insurers. In its latest 10-K filing, the company explained the setup of this new model:

Under proportional reinsurance contracts, which cover all of our products and geographic areas, we transfer or “cede” 75% of our premiums to our reinsurers. In return, these reinsurers pay us a “cession commission” of 25% for each dollar ceded, in addition to financing all of the corresponding claims, or 75% of all of our claims.

Sharing these bonuses allows Lemonade to reduce its capital requirements and increase its gross margin, but it also reduces reported revenue. This is why Lemonade’s second quarter revenue decreased year over year, even as its number of customers, premium in effect, premium per customer and gross earned premium increased:

Growth (YOY)

FISCAL 2020

Q1 2021

Q2 2021

Customers

56%

50%

48%

Premium in force

87%

89%

91%

Premium per customer

20%

25%

29%

Gross earned premium

110%

84%

90%

Data source: Lemonade. YOY = year after year.

For the full year, Lemonade expects its in-force premiums to increase 78% to 80%, gross earned premiums to increase 80% to 81%, and total revenue to increase by 30% to 32%. All three ranges are significantly higher than the management forecast provided with the May first quarter report.

Lemonade served 1.21 million customers in the second quarter, while its ADR (annual dollar retention) rate of 82% improved from 81% in the first quarter and 73% in the second quarter of 2020. L Lemonade’s ADR represents the percentage of its premium in effect. retained over a 12-month period, which roughly matches the number of clients they retain.

This growing percentage indicates that Lemonade’s expanding ecosystem – which already includes homeowners, renters, pets, and term life insurance products – is becoming more sticky and attracting more customers.

Beyond his net loss

Lemonade’s net losses look ugly, but its gross loss ratio actually declined sequentially from 121% in the first quarter – which was fully impacted by the winter storm in Texas in February. Its adjusted gross margin also increased sequentially and year over year as it weathered the winter storm and reaped the cost reduction benefits of its new reinsurance arrangements.

Metric

FISCAL 2020

Q1 2021

Q2 2021

Gross loss rate

71%

121%

74%

Adjusted gross margin

33%

21%

45%

Data source: Lemonade. YOY = year after year.

Unfortunately, these improvements are not yet helping Lemonade reduce its GAAP or Adjusted EBITDA losses, and it will likely remain unprofitable for the foreseeable future.

Metric (million USD)

FISCAL 2020

Q1 2021

Q2 2021

Net loss

($ 122.3)

($ 49.0)

($ 55.6)

Adjusted EBITDA

($ 97.9)

($ 41.3)

($ 40.4)

Data source: Lemonade. YOY = year after year.

For the full year, Lemonade expects its adjusted EBITDA loss to widen to a range of $ 173 million to $ 169 million. That’s on par with its previous forecast, reflecting its focus on investments over profit growth.

During the conference call, Lemonade CEO Daniel Schreiber said, “In the short term, we are not going to optimize EBITDA. Instead, Schreiber said Lemonade “will continue to monitor every dollar we invest” to see if it “generates new customers on new products.”

Lemonade remains a speculative (but fascinating) stock

Lemonade is trying to disrupt the traditional insurance market with an AI-powered all-in-one app that insures customers in 90 seconds. This approach, which bypasses the Byzantine process of buying insurance plans, has made it a popular platform for young people and new insurance buyers.

But Lemonade also faces similar technological competitors in the online insurance arena, and the continued expansion of its ecosystem with new features (such as its upcoming auto insurance platform) could squeeze its margins and scatter its resources.

If Lemonade can gain millions of new customers over the next few years, it could certainly disrupt the insurance market in the same way. Zillow changed the way people list and buy properties. But it’s still too early to say if the company will hit that target, and it will remain a speculative stock until it gains more clients and grows beyond its core US states.

That said, Lemonade’s key growth indicators are still on the rise, so investors who are willing to take a risk for potentially outsized gains should consider munching on this stock after its post-earnings pullback.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.


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