Lemonade(NYSE: LMND) just reported another round of results that look great on the surface. But some of its updates didn't please investors, and the stock tanked, after rising in anticipation of strong numbers. Let's see what's going on and why you might want to buy this artificial intelligence (AI)-based insurance stock.
1. Growth is stronger than you think
Lemonade reported strong growth in the 2024 second quarter. Revenue increased 17% year over year, while in-force premium (IFP) and gross earned premium (GEP) were both up 22%. That wasn't a well-received update, since that's a fairly low increase for a growth stock.
I think many of the Lemonade naysayers are viewing Lemonade as a tech stock rather than as an insurance stock. That's understandable; Lemonade doesn't easily fit into either box. But ultimately, Lemonade sells insurance, even though it does that through the use of AI and technology. So it has to be viewed in that context.
If you're looking at Lemonade purely as a tech stock, its performance looks disappointing. You can dismiss management's perpetually cheery view of the situation and over-the-top performance charts and explanations as mere talk, or you can see that it's trying to explain its progress in a complex business.
Insurance is a different beast than the typical tech company, and that's what makes Lemonade so compelling as a disruptor. For one thing, revenue isn't the standard top-line metric, because there are so many moving pieces in how money is handled. There's paying for policies and paying out claims, and the latter is a moving target. Lemonade pays a third-party reinsurer a percentage of its premiums, and then there's net income and cash, which each tell another part of the story.
Lemonade is growing its IFP at more than double the rates of traditional insurers like Allstate and Progressive. Its financial position isn't as strong as these established companies yet, but each quarter it demonstrates improvement. That's the next point.
2. Losses and loss ratio are improving
The most compelling parts of the recent update are the continued improvements in profitability. The loss ratio, which measures how much of a policy the company pays out in claims, finally looks to be steadily improving after a long period of volatility.
Image source: Lemonade.
Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) increased 18% to a $43 million loss. Net loss was $57 million, better than $67 million last year, and loss per share of $0.81 was better than Wall Street's expectations of $0.88. That's still a heavy loss, and it's not expected to turn net profitable in the near future.
Net cash flow, which is inflows minus outflows, was $4 million in the quarter after negative $51 million last year, and management expects that to stay positive save for the 2024 fourth quarter.
3. The AI edge is working
The premise of Lemonade being a better alternative to legacy insurance rests on the AI infrastructure, and so far, it appears to be working. Management said that while IFP increased 22%, headcount decreased by 9%, and it attributed that to the power of its technology, which is leading to higher automation.
It gave several examples of how its data and machine learning are leading to success. It has identified higher-risk home policies that it wouldn't underwrite today and didn't renew, and it expects to cut out more as its models become more accurate. It's also only selling policies in areas that its systems identify as having attractive unit economics.
It's not easy to see into the future and imagine how this could continue to play out, and there's plenty of risk as Lemonade gets there. But Lemonade is on track to achieve its vision, and if you can handle the risk and have a long enough time frame, you should consider buying Lemonade stock.
Should you invest $1,000 in Lemonade right now?
Before you buy stock in Lemonade, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Lemonade wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $657,306!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. TheStock Advisorservice has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of July 29, 2024
Jennifer Saibil has positions in Lemonade. The Motley Fool has positions in and recommends Lemonade. The Motley Fool recommends Progressive. The Motley Fool has a disclosure policy.
