In the six or so months following its public markets debut, Lemonade(NYSE: LMND) was a high-flying stock. But rising interest rates caused investors to be more critical of fast-growing and unprofitable businesses. Now, the shares trade 90% below their peak price from January 2021.
Lemonade just reported its second quarter (ended June 30) financials. The results were met with disappointment. But if you're considering buying this fintech stock on the dip, make sure you know these three things first. They will help you gain a better understanding of the company.
Slowing growth
Lemonade's rise follows a similar playbook of other tech-enabled businesses in massive industries. The result is tremendous growth. That's certainly been the case here.
The company leverages data and artificial intelligence to provide a superior user experience for its customers that are looking for renters, homeowners, auto, pet, and life insurance. Lemonade says that people can sign up for a policy in 90 seconds, while getting approved for a claim in just three minutes with immediate payouts. The beauty is that the business doesn't rely at all on salespeople or physical branches, instead leaning on a digital approach.
The fact that the insurance industry is so mature invites a tech-driven service provider to quickly find success. As of June 30, Lemonade had under 2.2 million customers, up 14% year over year and 80% higher than Q2 2021. In-force premiums and revenue increased 22% and 17%, respectively, compared to the year-ago period.
The gains have certainly slowed in this type of economic environment, but they are still impressive when you zoom out. However, executives forecast revenue to rise by only 10% in the current quarter. Perhaps this is why the stock tanked 17% immediately after the Q2 financial update.
Long-term ceiling
The insurance industry is big, with trillions of dollars in premiums written every year in the U.S. Customers look at various factors, like cost, coverage, and deductibles, before choosing what provider to go with. Lemonade deserves credit for positioning itself as a tech-forward enterprise focused on offering a superior user experience.
As a fully digital insurance platform that also emphasizes giving back, I wouldn't be surprised if Lemonade is resonating well with a younger demographic. The overarching goal probably rests on cross-selling insurance products and building life-long relationships with these customers.
In theory, Lemonade has a sizable addressable market. But with the incumbents likely benefiting from switching costs, its ultimate success might be limited. Industry heavyweights, like State Farm, Allstate, and Progressive, aren't resting on their laurels, either. They've all been investing in boosting their tech capabilities. This gives me reason to believe that Lemonade will never become a market leader.
Path to profitability
Like many tech-enabled growth companies, Lemonade has been consistently unprofitable. Through the first six months of 2024, it reported a total net loss of $105 million. And last year, the business lost $237 million.
With interest rates likely not getting back to the near-zero levels they were at for most of the past decade, Lemonade shareholders should be more demanding about the business getting to positive earnings sooner rather than later. That's due to the fact that owning an unprofitable company adds tremendous financial risk, because it means that capital might need to be raised at unfavorable times. It also represents an unproven business model that isn't sustainable yet.
In order to do this, though, management believes Lemonade's gross loss ratio needs to get to 70% or below. It came in at 79% in the second quarter, so there is a long way to go. With revenue growth slowing dramatically, it's hard to be optimistic.
Investors looking to buy this innovative insurance enterprise should now be a bit more informed about its operations.
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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lemonade. The Motley Fool recommends Progressive. The Motley Fool has a disclosure policy.
