Lemonade (LMND -3.71%) drew a stampede of bulls when it went public on July 2, 2020. The online insurer initially impressed investors with the disruptive potential of its AI-based chatbot app, which simplified the byzantine process of purchasing insurance plans for younger buyers, and the explosive its growth rates.
It listed its stock at $29, which opened at $50.06 on the first day and eventually jumped to an all-time high of $183.26 on January 11, 2021. But today, Lemonade shares are trading at around $12. Like many other hot tech stocks, Lemonade lost its luster as rising interest rates shot up its ballooning valuations and forced investors to focus on cooling growth and mounting losses.
A modest $2,000 investment in Lemonade’s IPO would grow to $12,639 at its peak before shrinking back to around $830. Let’s see why Lemonade’s stock took a turn for the worse, and whether it will rebound as another bull market begins.
Image source: Getty Images.
A small underdog with slowing growth
When Lemonade went public, it only provided insurance to homeowners and renters. But since its public debut, it has expanded into the life insurance, pet and auto insurance markets. Lemonade enabled its customers to easily sign up for their insurance plans and process their claims through a single chatbot-powered app. At the time of the IPO, about 70% of its customers were under the age of 35 – so its approach was clearly winning over younger and first-time insurance buyers.
Lemonade ended 2022 with 1.8 million customers, compared to 1 million customers at the end of 2020. That growth rate sounds impressive, but Lemonade is still small compared to traditional insurers like Allstate (EVERYTHING 0.48%)which serves about 16 million customers, and State Farm, which has more than 85 million policies in force.
For Lemonade to disrupt these insurance titans, it will need to grow its customer base at triple-digit rates every year. But in the past three years, growth in customers, premiums in force (IFP) and gross premiums earned (GEP) have cooled — even as it launched new types of policies to win more customers. Its gross margins are also down, suggesting it doesn’t have much pricing power, and its gross loss ratios are uncomfortably high.
|
Metric |
2020 |
2021 |
2022 |
|---|---|---|---|
|
Customer growth |
56% |
43% |
27% |
|
IFP growth |
87% |
78% |
64% |
|
GEP growth |
110% |
84% |
68% |
|
Adjusted Gross Margin |
33% |
36% |
25% |
|
Gross loss ratio |
71% |
90% |
90% |
Data source: Lemonade.
That delay comes even after it acquired Metromile last July to speed up the launch of Lemonade Auto. Lemonade Auto has only launched in five states so far, but it already faces stiff competition from established leaders like Allstate.
For 2023, Lemonade expects its IFP to grow only 11%-12% as GEP grows 29%-30%. Analysts expect its revenue to grow 48% to $381 million this year, but grow just 25% in 2024 after it fully closes its acquisition of Metromile. This delay suggests that Lemonade will struggle to break out of its niche and develop into a leading insurance platform.
There is no apparent path to profitability
The insurance market is dominated by large companies because their scale naturally prevents smaller companies from establishing themselves. That’s why Lemonade’s net losses have increased every year since the IPO.
Even on a more forgiving adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) basis, Lemonade’s loss widened from $98 million in 2020 to $184 million in 2021 and widened again to $225 million in 2022 .Analysts expect an even wider Adjusted EBITDA Loss of $240 million in 2023.
Lemonade believes it can eventually climb out of this hole by expanding into higher-premium markets (such as auto insurance) to increase its premiums per customer. But it still generates most of its revenue from homeowners and renters insurance — which carries lower premiums and is highly exposed to natural disasters. For example, the Texas winter storm in early 2021 caused Lemonade’s gross loss ratio to temporarily spike above 100%.
At the same time, many traditional insurance companies are launching similar AI-powered chatbot apps to counter Lemonade. Lemonade’s annualized dollar retention rate (ADR) of 86% at the end of 2022 suggests that about 14% of its customers are drawn from these market leaders and other competitors.
Lemonade turns into lemons again
Lemonade may look cheap at 2x sales this year, but many traditional insurers like Allstate are trading at less than sales this year. If Lemonade is just another insurance company — instead of the disruptive AI-powered platform it claims to be — then its stock could still be halved again when its growth cools. In short, Lemonade stock could remain in the penalty box for a long time — and another bull market likely won’t push the stock back up to its IPO price.
Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Lemonade. The Motley Fool has a disclosure policy.