A stock that goes public on the equity markets remains volatile in the near-term. There might be excitement surrounding the company if its part of a disruptive market and is viewed as a potential game changer. A company that recently went public on the NYSE is Lemonade Inc. (NYSE: LMND) that provides insurance products in the U.S. and Europe.
These insurance products primarily cover stolen or damaged property as well as personal liability in case the customer is responsible for any accident or damage. It also offers insurance for renters, homeowners, pet owners, and landlords in addition to life insurance. Founded in 2015, LMND stock is currently valued at a market cap of $4.47 billion.
A company generally raises equity capital to support its growth plans. Lemonade has managed to increase its sales from $22.5 million in 2018 to $94.4 million in 2020. LMND stock went public in July 2020 and has since gained 4.77% which suggests its trading at a price similar to its post-IPO closing price.
However, Lemonade stock is also down 60% from record highs allowing investors to buy the dip.
Recent quarterly results did not impress Lemonade investors
In the second quarter of 2020, Lemonade’s sales fell by 6% year over year to $28.2 million. It’s net loss widened to $55.6 or $0.90 per share million from $21 million in the year ago quarter. While a negative top-line growth for a stock valued at 40 times forward sales might seem steep, investors should note that this was due to a change mentioned in its 10-K filing.
In Q3 of 2020, the company issued proportional reinsurance contracts with partners. Under this agreement, Lemonade would transfer 75% of its premiums to reinsurers. In exchange, the reinsurers would pay Lemonade a transfer commission of 25% for every dollar ceded. Further, reinsurers will also fund all the corresponding claims which stands at 75%.
Lemonade explained it can lower capital obligations due to this model, allowing the company to improve gross margins and overall profitability in the process. Despite an increase in the number of customer’s Lemonade sales declined in Q2 due to the premium sharing agreement.
Lemonade’s top-line is all set to experience accelerating growth going forward. Wall Street forecasts sales to rise by 87.5% to $33.4 million in Q3 and by 90.4% to $39 million in Q4. Its revenue is expected to grow by 31.5% to $124 million this year and by 63% to $202.4 million in 2022.
Lemonade ended Q2 with a customer base of 1.21 million and reported an annual dollar retention rate of 82%, higher than the corresponding figure of 73% in the prior-year period. The annual dollar retention showcases the percentage of the company’s in-force premiums or IFPs that are retained in the last 12-months. This rate is helpful to investors as it shows Lemonade’s ability to retain customers and sell additional products in the process.
What next for LMND stock?
Lemonade remains unprofitable but it has managed to increase gross margin from 33% in 2020 to 45% in Q2 of 2021. Similar to other growth companies, even Lemonade is sacrificing bottom-line expansion for a revenue boost. It estimates adjusted EBITDA losses between $173 million and $169 million which will be wider than its loss of $98 million in 2020.
However, LMND stock is viewed as a market disruptor and can gain pace if it continues to grow its customer base. Despite its frothy valuation, LMND stock is trading at a discount of 10% to consensus 12-month price target estimates.
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