If a stock has fallen almost 75% in the last year, is it a good buy? Does the fall represent overselling, or were the company's fundamentals shaky, to begin with? Many investors ask similar questions of Lemonade (NYSE: LMND), the new age fintech insurer that has seen its shares drop in the last 12 months.
Lemonade uses a mix of artificial intelligence and behavioral economics to cut out the sales agent in the insurance business. This helps insurance companies acquire customers at a much lower cost. In addition, its AI could eliminate the need for an expensive, commission-based insurance agent. However, Lemonade’s losses are mounting, and from the looks of it, they won’t stop anytime soon.
How did Lemonade perform in Q4 of 2021?
The company reported revenue of $41 million for Q4 of 2021, up 100% from $20.5 million in the year-ago period. Lemonade’s revenue growth pushed operating expenses to $84.5 million in Q4, compared to $44.6 million in Q4 of 2020.
The major expenses were in sales & marketing, tech development, and general & administrative costs. As a result, the net loss for Q4 2021 was $70.3 million compared to $33.9 million in the corresponding quarter of 2020.
One major positive for Lemonade is that the company closed 2021 with cash and equivalent balances of over $1 billion.
Apart from the cash, 2021 also saw Lemonade Car, an auto insurance product, take off. The company said, “Lemonade Car is off to a strong start in Illinois, with about 3/4 of Lemonade Car customers bundling it with at least one other Lemonade policy.”
Lemonade is unique in the insurance tech space because it offers car, home, life, pet, and renters’ insurance on its platform. Most other insurtechs provide only one product.
Lemonade got into auto insurance after acquiring Metromile. Its auto insurance product is different because Metromile had another way of calculating insurance premiums. Generally, one’s premium is calculated based on the car's age, the country you live in, and your traffic/driving record.
However, Metromile decides its premiums based on how many miles a car has been driven. According to the company, its premiums save people up to 47% in the long run. So in an age where people are driving very little, Lemonade’s offering might be attractive.
LMND stock is trading at a discount
What one needs to remember about Lemonade is that it is a growth stock. And growth stocks tend to lose money for a long time. Smart investors know that losses can be digested as long as revenues keep rising in tandem. The danger is when losses go up, but revenues don’t. As of now, Lemonade’s revenues are keeping pace with its rising losses.
A significant revenue booster for Lemonade could be its auto insurance. The acquisition of Metromile gives it access to 49 states where Metromile is already licensed. This is a shortcut (in terms of time) to all the markets it can enter.
The biggest challenge for Lemonade is to control its gross loss ratio. Q4 2021 saw this come in at a mind-boggling 96%. The gross loss ratio is the percentage of premiums that is paid out as claims.
If an insurance company is paying out nearly all of its premium, there will be very little left to support operating expenses. And the scary part about this payout is that Q4 didn’t see any major natural event that required money to exit the system. This points to a management challenge that is not reassuring for investors.
The company closed trading on April 18 at $22.54. Analysts have given LMND stock a target of $39, a potential upside of over 73% from its current levels.