Lemonade (NYSE: LMND) is a company I’ve been following since its IPO announcement in 2021. The company’s shares peaked at $108/share in July 2021 and have since fallen by ~72%. This drop in share price was driven by rising interest rates, in addition to slowing customer growth and increased losses. However, amid this gloom, Lemonade’s stock has grown by ~50% since the end of July with 30% of the gains coming within the last five days. The company recently released its best financial results for the second quarter of 2022, surpassing both revenue and profit. In this discussion, I will discuss the company’s ways of getting paid, we need to get your hands on it.
Disruptive Business Model
Lemonade is an Insurtech company with a mission to disrupt traditionally insurance industry, which is worth $5 trillion worldwide. Lemonade aims to do this by offering its easy-to-use app and customer-facing approach to selling insurance. Traditional insurance companies are to be known due to user experience and can be expensive.
According to one words from a Gartner expert;
“Insurance companies are used to making money off of misunderstandings, such as making the application process unnecessarily difficult and concealing hidden secrets.”
Insurtech companies like Lemonade are trying to solve this problem by introducing a self-service, user-friendly solution, powered by Artificial Intelligence. Lemonade technology he says helps customers save up to 80% on their insurance costs in less than 90 seconds. No complicated forms to fill out or questions to try to find you, just simple and easy for users.
Customers want this “Amazon Style”. Product Marketing Experience, Customization, Fast and Easy. The company also has a proven track record, which is the reason for its fixed price. Lemonade takes an insurance fee and if there is an unaccounted amount at the end of the year, the company gives up to 42% to the sponsors they choose. This is called “Retribution” system it’s a smart move to not only align the company’s interests with customers, but also appeal to millennials.
Lemonade started with mortgage insurance but expanded into homeowners, auto, pet and life insurance. His job is to “grow with the customer” and be with them in every part of their life. The company operates in the United States, Germany, the Netherlands, and France while expanding globally.
Lemonade soon to be expanded its new Car insurance company Metromile’s recent acquisition of 7.3 million shares of Lemonade stock. The company believes that its car insurance is “the most exciting product in the market” and with Metromile it believes that it has more advantages than other insurance companies. Metromile uses sensors inside your stand to offer you affordable “pay by mile” insurance where the way you drive affects the price you pay.
Lemonade was founded in 2015 by Daniel Schreiber and Shai Wininger. Schreiber is a former SanDisk Executive with several patents under his name. But most importantly, he is an entertaining speaker and a great marketer. I believe that part of Lemonade’s high price during the IPO was driven by the storytelling ability and Schreiber himself. Co-Founder Shai Wininger is also in the class, as the former founder of Fiverr (FVRR) is a former entrepreneur and technology expert. These are the kind of people you want to have company with. According to insider trading data, Wininger owns 4.93% of the company and thus has “Skin in the Game”.
Juicy Second Quarter
Lemon energizer finances for the second quarter of 2022. The amount was $ 50 million, which beat the consensus of $ 47.6 million. This was also up 77% year-over-year and 12% sequentially. Compulsory premium per customer (active policies) has also increased by 54% every year. While premium per customer jumped 18% year over year to $290. As of Q2, Lemonade’s total customer base reached 1.58 million, growing at 31% year over year. Customer growth numbers started to slow last year and that’s when management decided to focus on more product streams and expand the wallet segment.
The directors added another color to their financial report, with a bold statement;
“We are not changing the way, but changing the direction”
He then used the analogy of driving and managing Miles per Gallon as an example opponents in Miles per hour, depending on economic conditions and inflation.
The company’s losses were a concern but Q2 adjusted EBITDA loss decreased to $50.3M compared to a loss of $57.4M in the previous 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 comparison. However, it should be noted that this was much worse than the $0.90 made in Q2 2021.
Purchasing and Marketing expenses decreased in the Quarter by $1 million sequentially to $37 Million. This can show the company’s miles per gallon ratio. However, it should be noted that this is still higher than the $33 million invested in the second quarter of 2021.
Going forward, management will control the growth of two types of money “as far as the eye can see”. They estimate $63M-$65M in Q3 revenue from the $57.0M deal.
Full-year adjusted EBITDA losses are also expected to narrow to a loss of $240M-$245M versus a loss of $265M-$280M previously.
The company has $381 million in cash, the equivalent of short-term cash. A total of approximately $24 million in total debt.
To show Lemonade’s value, I’ve linked the most recent earnings to my top valuation, which uses the low-cost method of accounting. I predicted economic growth of 60% next year (which is lower than the 77% growth that was reported). I have also predicted 50% revenue growth over the next two to five years.
In terms of margins, I have predicted that the company will work up to 22%, which is below the software industry. I estimate that the company can do this in eight years as it expands its operations.
As a result of this I get a reasonable price of $ 34 / share, the stock is sold at $ 28 / share and thus is ~ 19% cheaper at the time of writing.
With a founder-led company like this, I look for a sign like insider buying to show that management has faith in the company. As mentioned earlier, co-founder Shai Wininger has a large stake in the company, but I could not find any recent information on Schreiber Holding. Ideally, I would like to see strong internal buy-in by both the founders and the broader management.
The company is still unprofitable, and the losses don’t seem to have subsided yet. Shipping costs can also be a problem and considering the sales price for the 10th sale, one may not consider it “cheap”. Considering the growing economic growth prices and inflation, Wall Street is very concerned about “Inventory Growth” and tends to vote with their feet at the first sign of trouble.
Lemonade is a giant company that is disrupting the traditional insurance industry. They have made great growth and will continue to do well. Its founders are experienced technology professionals and storytellers, helping to keep the brand interesting and current business news. Products are rarely tested, assuming they can exceed the strong growth forecast and expand margins. However, the road is long, so investors waiting for a “liquid” return will need to optimize their miles per gallon.