Lemonade(NYSE:LMND) Shares just hit a 52-week high following third-quarter earnings reports. In recent months, post-earnings gains have always been followed by a plunge back to where they started. Will this change? The insurance tech company reported great results, so this could stick, and Lemonade stock could finally be on the rise. Let’s go through the results and what they mean for the future of Lemonade.
Lemonade is an insurance company and measures its growth and success somewhat differently than other types of companies. Revenue and profit are still important metrics, but Lemonade’s favorite revenue metric is current premiums (IFP), or the average of current policies in force during the quarter. Because policies are paid for by customers, but not everything turns into revenue, this is the metric that gives investors a more accurate picture of the story.
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IFP rose 24% year over year in the third quarter, an acceleration, and revenue rose 19%. The total number of customers increased 17% year-on-year to 2.3 million, and premium per customer increased 6%. Lemonade’s strategy is to attract younger customers and grow with them, which leads to more policies and more expensive policies over time, and it’s working.
Lemonade is a young company and not yet profitable. It went through a launch phase as it expanded from renters insurance to homeowners, pets, life insurance and auto, and it is still being rolled out across the US. It also has some international activities.
Investors are dissatisfied with the pace of improvements, but management is confident that the benefits of digital systems will emerge over time and with scale and that Lemonade will become profitable. You can already see some results as sales grow without increasing headcount. At the same time, the IFP increased by 24%, while the workforce decreased by 7%.
Net loss rose to $68 million this year from $62 million last year, but loss per share was better than Wall Street’s expected $1.03 at $0.95. Operating cash flow was positive $16 million, and net cash flow, which is defined as the change in total cash, cash equivalents, restricted cash and investments, was $48 million.
Lemonade is still spending heavily on marketing as it gets its name out there, and expects to increase marketing costs next quarter. So while scale leads to profitability at one level, it is not – yet – enough to surpass costs and make the company profitable. At this point, analysts still expect Lemonade to be unprofitable at least until 2025, but management expects adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to turn positive in 2026.
Investors are closely watching Lemonade’s loss ratio as it is the biggest evidence of its long-term viability. The loss ratio simply measures how much of a policy is paid out in claims, so lower numbers are better. This number is tied to the company’s underwriting capabilities and ability to match interest rates to risk.
Management has touted that it is a digital company based on artificial intelligence (AI) infrastructure, and that the shift from human intervention in favor of machine learning and connected systems would ultimately lead to improved algorithms that legacy insurers cannot beat . It’s taken a while, but it looks like this is going to happen.
I said last week that the market would be happy if the loss ratio fell below 80%, where the market has held for the past three quarters and would represent a decline of 4 percentage points year over year. It came to 73%, or 10 points lower than last year. The trailing-twelve-month loss ratio was 77%, an improvement of 11 points year-on-year, and this was the fifth consecutive quarter of consecutive improvement in the trailing-twelve-month figure.
Image source: lemonade.
Management has changed the composition of the policy to be less prone to catastrophes. The company is reducing its exposure to homeowners insurance, especially in California, and continues to roll out auto insurance in several states. That contributes to the better loss ratios, and should continue as these trends continue.
It’s not easy to value Lemonade stock, because they’re not a typical retail or technology stock, and far from a typical insurance company. The price-earnings ratio or price-cash flow ratio does not work for unprofitable stocks, and a price-sales ratio is less reliable because sales are not basic sales.
That said, Lemonade shares trade at a price-to-sales ratio of 3.4, which is well below its three-year average of 6.4. That’s also reasonable for a fast-growing stock.
Don’t expect lemonade supplies to skyrocket overnight. It is not likely to increase linearly. Instead, it will likely reflect the trajectory of the loss ratio as Lemonade finds its footing. If you can handle some potential volatility and have a long-term horizon, now might be a good time to take a chance on this stock.
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Jennifer Saibil holds positions in Lemonade. The Motley Fool holds and recommends positions in Lemonade. The Motley Fool has a disclosure policy.
Lemonade Investors Just Got Some Incredible News was originally published by The Motley Fool
