Lemonade: The Stock Gets Juiced On A Mixed Q3

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Lemonade, Inc. is an innovative digital-only insurer.The author previously provided readers with a profitable trade on Lemonade earlier this year.LMND is buying their customers.Despite massive ...

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(NYSE:LMND) is an innovative digital-only insurer. The stock is incredibly volatile. This is an insurance company offering a wide range of products, like renters and car insurance, among other options. They use bots and machine learning, aiming for near-zero paperwork and rapid action and decision-making, but when there are claims, there is still agent interaction for needs like documentation. Make no mistake, insurance is a highly competitive industry, and catastrophes that strike come and go, hurting quarters here and there. But Lemonade works for many consumers, and the company has managed to take market share and grow its user base from other insurers. But the company loses money. The question is whether the company can meaningfully move to profitability. Meanwhile, shorts are betting against it, with short interest north of 20%. We offered you a trade on this stock earlier in the year for the public site. The trade we outlined is below:  Target entry 1: $15.60-$15.75 (30% of position). Target entry 2: $15.00-$15.25 (30% of position). Target entry 3: $14.00-$14.25 (40% of position). Target exit: $20. Stop loss: 11. Note this is a sample trade style from our Investing Group, BAD BEAT Investing, and all trades are featured in a similar manner with additional guidance on simple options for many of the trades.\"  So, obviously, this worked out, but with shares surging today, is there more upside ahead? We think that shorts will cover some, but start to circle the wagons once again. We expect ongoing volatility. We would be holders here, not buyers. If we dip back into the teens, which is more than likely with the way this trades, we would enter again. Let's touch on the just reported earnings. Discussion The actual top-line results were pretty good for Q3. It was a top and bottom-line beat versus estimates. Once again, the company saw immense year-over-year growth. Q4 revenue was $136.6 million, increasing 19.3% versus last year's Q3. We saw increases in gross earned premiums during the quarter. The so-called \"in force premiums\" which Lemonade defines as \"the aggregate annualized premium for customers as of the period end date,\" increased by 24% year-over-year to $889 million. This is detailed in the shareholder letter. Much of the growth in premiums and revenues was due to a 17% increase in the number of customers and a 6% increase in premiums per customer. That is a winning combination. More customers, and on average, each customer is paying more. Solid results here. The market has not rewarded the stock much due to dilution and the lack of profitability, but the customer growth now has hit over the 2.3 million mark. Following the so-called in-force premiums, gross earned premiums hit $213.1 million and increased by $39.9 million or 23% from a year ago. Naturally, this was a result of the increase of \"in-force premiums\" collected in the quarter that we noted above. We also note that the gross loss ratio continues to trend in the right direction, which was just 73% this quarter, a 10 basis point improvement from a year ago. Now, here is the thing. Profit on the bottom line continues to be negative. And it actually weakened. We can look at all sorts of metrics, but at the end of the day, actual profit does matter. The company does have a very healthy gross profit, but operating expenses continue to be too high and crush earnings per share. Gross profit hit $38 million and jumped by 71% from last year. This also comes as a result of better-earned premiums and an improved loss ratio. The company has worked to reduce operating expenses, which is positive, but they remain far too high and are only expanding. With more customers and more earned premiums, the company is spending more. Total operating expense was $124.5 million and increased by $26.3 million or 27% versus a year ago. This was largely from lower employee-related costs, but huge spend to acquire customers. This is a negative, folks. The company is buying customers. Adjusted EBITDA was still a loss of $49 million. The kicker? This is a bigger loss than the loss of $40.2 million a year ago. However, net cash flow was positive $48 million versus $3 million a year ago. So that is positive. The Street reaction is a bit confusing, but may be related to guidance. The company states it is on track for adjusted EBITDA profitability in 2026. Now, that does not mean EPS is positive, but is moving in the right direction if they can execute. Continuing to buy customers with aggressive spend, however, is likely to continue in Q4 and in 2025. There are other risks to be aware of here too, like the extensive share-based compensation expenses over the years. Plus, this is an insurer, which means they are susceptible to seasonal fluctuations and catastrophe losses that can be difficult to predict. This is just the nature of the business. So, as traders, we would not be chasing the stock here. We had a great trade on the stock. We would come back to Lemonade, Inc. if shares retrace once again to the teens, which history suggests is likely after this rally. From an investment standpoint longer-term, it comes down to innovations in AI, growing customers, and hitting the goals of being cash flow positive and EBITDA positive.  Editor's Note: This article covers one or more microcap stocks. 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