Lemonade (NYSE:LMND) is a company I have followed since its fanfare IPO in 2021. The company’s shares hit an all-time high of $108/share in July 2021 and since then have slid down by ~72%. This decline in share price was driven by the rising interest rate environment, in addition to slowing customer growth and mounting losses. However, in the midst of this darkness Lemonade stock has popped by ~50% since the end of July with 30% of that gain coming within the past five days. The company has recently produced fantastic financial results for the second quarter of 2022, beating both revenue and profit estimates. In this post I’m going to dive into the company’s business model and break down its latest financial results, let’s dive in.
Disruptive Business Model
Lemonade is an Insurtech company which is on a mission to disrupt the traditional insurance industry, that’s worth a staggering $5 trillion globally. Lemonade aims to do this by offering its user-friendly app and customer-centric approach to selling insurance. Traditional insurance companies are known for having a poor user experience and can be expensive.
According to one quote from an analyst at Gartner;
“Insurance companies are accustomed to making money off of friction, like making claims processes unnecessarily difficult and coverage that’s less than transparent.”
Insurtech companies such as Lemonade aim to solve this problem by introducing a self-service, low-friction experience for users, optimized with Artificial Intelligence. Lemonade’s technology reportedly enables customers to save up to 80% on their insurance cost in less than 90 seconds. No complex form filling or questions to try and catch you out, just a simple and easy user experience.
Customers are demanding this “Amazon Style” Product Marketing Experience, Personalized, Fast and Easy. The company also has a transparent claims procedure, which is thanks to its fixed price model. Lemonade takes a flat fee for an insurance policy and if there is unclaimed money at the end of the year, the company gives up to 42% to a charity of the customers choosing. This is called the “Give back” scheme and is a genius move to not only align the interests of the company and customers, but also to appeal to the socially conscious millennial.
Lemonade started with renters insurance but has since expanded to homeowners, car, pet and even life insurance. Its mission is to “grow with the customer” and be with them through every stage of their life. The company currently operates across the United States, Germany, the Netherlands, and France while continuing to grow globally.
Lemonade has recently expanded its new relatively new Car insurance offering with the recently closed acquisition of Metromile in an all-stock deal for 7.3 million shares of Lemonade stock. The company believes its car insurance product is the “most delightful product on the market” and with Metromile they believe they have a data advantage over other insurance companies. Metromile uses sensors embedded inside your vertical to offer cost-effective “pay by mile” insurance in which the way you drive impacts the price you pay.
Lemonade was founded in 2015 by Daniel Schreiber and Shai Wininger. Schreiber is a former SanDisk Executive who has a number of Patents under his name. But more importantly, he is a fantastic storyteller and great marketer. I believe part of Lemonade’s high valuation during the IPO was driven by the storytelling ability of the brand and Schreiber himself. Co-Founder Shai Wininger is also a class act, as the former founder of Fiverr (FVRR) he is a veteran entrepreneur and a technology genius. These are the type of people you want to be running a company. According to insider trading data, Wininger owns 4.93% of the company and thus has “Skin in the Game”.
Juicy Second Quarter
Lemonade produced strong financials for the second quarter of 2022. Revenue was $50 million, which beat consensus estimates of $47.6 million. This was also up a blistering 77% year over year and 12% sequentially. Inforce premium per customer (active policies) also increased by a substantial 54% year over year. While premium per customer jumped by 18% year over year to $290. As of Q2, Lemonade’s total customers stand at 1.58 million, growing at 31% year over year. Customer growth numbers started to slow down last year and that is when management made the decision to focus on multiple product streams and expand the share of wallet.
Management added some color to their earnings report, with a bold statement;
“We’re not changing course, but changing pace”
They then went on to use the analogy of driving and optimizing for Miles per Gallon as opposed to Miles per hour, given the current macroeconomic environment and the higher cost of capital.
The company’s losses were still a concern but Q2 adjusted EBITDA loss did narrow to $50.3M compared with a loss of $57.4M in the prior quarter and a loss of $40.4M in Q2 2021. Q2 GAAP Earnings Per Share also came in better than consensus at -$1.10 vs -$1.32 estimates. However, it should be noted this was still more negative than the -$0.90 produced in Q2 2021.
Sales and Marketing expenses were reduced in the Quarter by $1 million sequentially to $37 Million. This may be reflecting part of the company’s miles per gallon optimization strategy. However, it should be noted this is still higher than the $33 million invested in the second quarter of 2021.
Moving forward, management has guided for double-digit revenue growth for “as far as the eye can see”. It has estimated $63M-$65M in revenue for Q3 up from the $57.0M consensus.
Full year adjusted EBITDA losses are also expected to narrow to a loss of $240M-$245M vs. loss of $265M-$280M previously.
The company has a strong balance sheet with $381 million in cash, cash equivalents and short-term investments. In addition to approximately $24 million in total debt.
In order to value Lemonade, I have plugged the latest financials into my advanced valuation model, which uses the discounted cash flow method of valuation. I forecasted 60% revenue growth for next year (which is lower than the prior 77% growth reported). I have also forecasted 50% revenue growth for the next two to five years.
In terms of margins, I have forecasted the company’s operating margin to increase to 22%, which is below the average of the software industry. I am estimating the company can do this in eight years as they scale operations.
Given these factors I get a fair value of $34/share, the stock is trading at $28/share and thus is ~19% undervalued at the time of writing.
With a founder-led company like this, I would look for a signal such as insider buying to show management has faith in the company. As mentioned prior, co-founder Shai Wininger has a substantial stake in the company, but I could not find up-to-date details on Schreiber Holding. Ideally, I would like to see strong insider buying by both founders and broader management.
The company is still unprofitable, and the losses don’t seem to have narrowed yet. Stock-based compensation could also be an issue and Given the stock trades at a forward price to sales of 10, one may also not deem it to be “cheap”. Given the macroeconomic environment of rising interest rates and inflation, Wall Street is extra sensitive to “Growth stocks” and tends to vote with their feet at the first sign of trouble.
Lemonade is a tremendous company which truly is disrupting the legacy insurance business. They have generated strong growth and have continued to execute well. Its founders are experienced technology veterans and great storytellers, which helps to keep the brand engaging and investor story current. The stock is undervalued intrinsically, assuming they can keep up the solid growth rates forecasted and grow margins. However, the road is long, so investors waiting for a “juicy” return will need to optimize for miles per gallon.