Summary
Lemonade, Inc. stock was once a triple-digit stock that sold down to single digits as profitability has become long elusive.
Revenue growth has been impressive but has slowed to a degree.
We like Lemonade, Inc. stock as a buy at $10-$11 here on this news for the growth outlook, and losing less money.
Long-term, Lemonade, Inc. will need to work to being profitable, but it lacks a moat.
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Lemonade, Inc. $Lemonade, Inc.(LMND)$ is an innovative digital-only insurer. Insurance is an incredibly competitive landscape, but Lemonade has managed to take market share from other insurers for itself over the years. We have traded this stock previously at BAD BEAT Investing long and short, but feel Lemonade, Inc. stock is now setting up for a speculative long trade following the most recent Q1 earnings report.
For those unfamiliar, Lemonade, Inc. is a digital insurer that offers renters, homeowners, car, pet, and life insurance. The company is heavily integrating artificial intelligence to attract customers and price policies. They can often compete with traditional insurers because they don't have to deal with brokers and bureaucracy, removing costs, and instead use bots and machine learning, aiming for zero paperwork and instant everything.
Lemonade continues to expand globally. While it may have no true moat to prevent others from coming into the landscape, we do have to note that this is a long-term issue. What matters to us is the near-term, and we think that over the next few weeks a trade plays out in Lemonade, Inc. following the strong just-reported earnings.
The play
Target entry 1: $11.15-$11.30 (30% of position)
Target entry 2: $10.65-$10.90 (30% of position)
Target entry 3: $10.00-$10.10 (40% of position)
Target exit: $14
Stop loss: 8.50.
Discussion
The company saw immense year-over-year growth. First quarter revenue was $95.2 million, increasing by $50.9 million or 115% versus last year's Q1. Why? The gains were due to the increase of gross earned premium during the quarter for the most part. The so-called "in force premiums" which Lemonade defines as "the aggregate annualized premium for customers as of the period end date," increased by 56% year-over-year to $653.3 million as compared to Q1 2022.
Much of the growth in premiums and revenues were due to a 23% increase in the number of customers and a 26% increase in premium per customer. That is a winning combination for an insurer. Following the so-called in force premiums, gross earned premium jumped to $154.2 million, a huge $58.2 million or 61% as compared to Q1 2022. The gross loss ratio continues to trend in the right direction, hitting 87% this quarter.
Now Lemonade, Inc. is making a gross profit, but operating expenses continue to be high and crush earnings per share. Gross profit was $16.5 million, which increased by $6.3 million or 62% versus Q1 2022. To the company's credit, operating expenses did not increase as much as we expected. We saw this coming in over $100 million. Total operating expense in Q1 increased by $3.8 million to $96.3 million versus $92.5 million a year ago. Adjusted EBITDA improved on this.
Adjusted EBITDA was still a loss of $50.8 million but they lost $6.6 million less compared to an EBITDA loss of $57.4 million a year ago. This translated to a much better than expected EPS figure. Even though the company is still losing money, it is moving in the right direction. Now we understand, this market does not love money-losing tech, but Lemonade seems like a survivor, constantly moving in the right direction of late it seems. Net loss in Q1 was $65.8 million, or $(0.95) per share, whereas a year ago in Q1 2022 the company lost $74.8 million, or $(1.21) per share.
But what about as we look ahead? Well, Lemonade, Inc. has cash, cash equivalents, and investments of $993 million and minimal debt. As we look to Q2, we are looking for $666 - $669 million of in-force premium with gross earned premium of $157 - $159 million. Management is a bit conservative in its revenue guide of $96 - $98 million, but we expect revenue comes in higher, possibly at $100 million as the company expands into more markets. That said, the adjusted EBITDA loss will be in excess of $55 million. For the year, the company expects revenue of $392 - $396 million and adjusted EBITDA loss of up to $205 million. This would be a 10% improvement over 2022.
Obviously, we are not without risk here with Lemonade, Inc. There is huge stock-based compensation. Revenue generation is strong, but the company is spending to grow. It should continue to lose money for many quarters, but key metrics are moving in the right direction. Make no mistake, Lemonade, Inc. remains speculative, and future debt needs could be costly.
However, we appreciate the expansion of the Lemonade, Inc. business. Many innovative tech companies lose money for many years. Lemonade, Inc. may be no different. The lack of a true moat may be the largest long-term issue, but since we are looking at a short-term trade, this may not matter with Lemonade, Inc.
Source: Seeking Alpha
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