Wall Street wasn't happy with the insurance technology upstart's latest update.
Investors gave Lemonade (LMND -0.24%) a thrashing after its fourth-quarter earnings report, so you'd likely be surprised to hear that the results were excellent.
Lemonade is one of those stocks that investors have a hard time rallying around even when it's reporting solid progress. It's not for no reason, of course. Let's see why investors were down on Lemonade stock, again, and if the negative really outweighs the positive.
It's not just the loss ratio
First, the main numbers: In-force premiums increased by 20% year over year, with a 12% increase in customer count and a 7% increase in premium per customer. Net loss improved from $64 million in the prior-year period to $42 million this time. Notably, its loss ratio improved by 12 percentage points from last year, from 89% to 77%.
Lemonade has been demonstrating robust growth since it went public, and investors have been patiently (or not so patiently) waiting for it to become profitable. That's measured in several ways, with the loss ratio playing a major role in investor sentiment. A loss ratio that's consistently too high indicates that Lemonade isn't pricing its policies effectively or otherwise can't figure out how to operate a viable business. So this is the kind of earnings report you'd expect investors to cheer. Instead, Lemonade stock fell more than 10% after the report came out.
Carving out a tricky niche
Investors who invest in insurance stocks are expecting stability and profit. The big insurance companies have been around for decades, some for more than a century. They have finely honed algorithms and know how to effectively price their policies to make money.
The new breed of insurance technology companies are combining this age-old business with new technology. Tech investors have a higher tolerance for periods of growth without profitability, but Lemonade still operates in insurance and has huge, established, and profitable companies as competitors. It touts its artificial intelligence-driven algorithms as better than the old tools, but until it can turn itself into a profitable business, it can't offer what the legacy insurance giants do for investors.
Slow progress on a great idea
The part of Lemonade's fourth-quarter update that may have spooked investors was that management intends to start investing in growth again after hitting the brakes last year. And yet, management is anticipating a revenue increase of 19% in the 2024 first quarter and also the full year, lower than the average analysts' expectations of 21% and 20%, respectively.
Investors are also losing patience as Lemonade continues to inch toward net profitability. Management gave a complicated analysis about how it's planning to increase its spending to generate growth, but the cash is coming from its "synthetic agents" program. That's a fancy way to say it's coming from an outside investment source that funds some expenses. The upside of that is that while it comes off of expenses and weighs down the bottom line, it doesn't come out of Lemonade's cash. Management is expecting net cash flow to become positive in the first half of 2025, and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to become positive a year later.
Profits could still be a while away
Lemonade is making progress, and its long-term potential looks compelling. However, it's still taking steps backward as it tries to lunge forward. Even as it expects lower growth, it's ramping up expenses, though management says these investments lay the groundwork for profitability later on.
That's the opposite of what investors want to see. Even though Lemonade is still a fairly young company, it's been operating long enough that investors are ready to see scale leading to higher profit. Even with its higher outlays, Lemonade is expecting improvement in EBITDA, but at more moderate rates -- a 19% increase in the first quarter, and a 10% increase for the full year. It could still be years away from net profitability.
Should you buy Lemonade stock?
This could be an opportunity to buy Lemonade stock on the dip. If it begins to report consistently lower loss ratios or positive cash flow, the share price could finally start to rise. But it could be a long trajectory with many bumps along the way. If you have an appetite for risk and a long time horizon, you might want to take a small position in Lemonade stock right now.
Jennifer Saibil has positions in Lemonade. The Motley Fool has positions in and recommends Lemonade. The Motley Fool has a disclosure policy.
FAQs
Based on analyst ratings, Lemonade's 12-month average price target is $24.67. Lemonade has 71.56% upside potential, based on the analysts' average price target. Lemonade has a consensus rating of Hold which is based on 1 buy ratings, 1 hold ratings and 1 sell ratings.
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The Motley Fool has positions in and recommends Amazon, Home Depot, Mastercard, and Visa.
Is lemonade making money? ›
Lemonade continues to enjoy high growth, with more customers and revenue, and the loss ratio decreased in the fourth quarter. Its financial condition is improving, but it's still reporting large net losses.
How do you value a stock Motley Fool? ›
The most common way to value a stock is to compute the company's price-to-earnings (P/E) ratio. The P/E ratio equals the company's stock price divided by its most recently reported earnings per share (EPS). A low P/E ratio implies that an investor buying the stock is receiving an attractive amount of value.
Will LMND ever recover? ›
It's a good sign that Lemonade's targeting a 75% loss ratio with an eye to achieving profitability at some point. Thus, Lemonade's shareholders should see Lemonade's reasonably likely "recovery" in 2023 not as near-term profitability but as loss-ratio management and bottom-line improvement.
What is the future of LMND stock? ›
Based on short-term price targets offered by seven analysts, the average price target for Lemonade comes to $19.00. The forecasts range from a low of $9.00 to a high of $40.00. The average price target represents an increase of 32.13% from the last closing price of $14.38.
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What is the downside of lemonade? ›
Lemonade is acidic
Yes, lemonade is also incredibly acidic, and this can cause a problem for people with a predisposition towards acid reflux or other gastrointestinal issues. Acidity can cause uncomfortable problems such as heartburn or indigestion as our stomach acid levels increase.
Is it cheaper to buy lemonade or make it? The answer is, it is generally cheaper to buy lemonade than to make it. As an example, you can buy a 7-cup carton of Newman's Own on Peapod.com for $2.29 and spend about $6 on ingredients to make about the same volume of homemade lemonade.
Is lemonade losing money? ›
Lemonade (LMND) came out with a quarterly loss of $0.67 per share versus the Zacks Consensus Estimate of a loss of $0.81. This compares to loss of $0.95 per share a year ago. These figures are adjusted for non-recurring items. This quarterly report represents an earnings surprise of 17.28%.
What is the rule of 72 Motley Fool? ›
Let's say that you start with the time frame in mind, hoping an investment will double in value over the next 10 years. Applying the Rule of 72, you simply divide 72 by 10. This says the investment will need to go up 7.2% annually to double in 10 years. You could also start with your expected rate of return in mind.
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Motley Fool Stock Advisor has a strong track record of stock recommendations with investment returns that have outperformed the broader market over the long term. Investors are still advised to diversify their portfolios with more than just Motley Fool Stock Advisor's picks.
What is the Lemonade stock forecast for 2030? ›
Lemonade Stock Prediction 2030
In 2030, the Lemonade stock will reach $ 14.47 if it maintains its current 10-year average growth rate. If this Lemonade stock prediction for 2030 materializes, LMND stock will grow -10.70% from its current price.
What is the stock market forecast for Lemonade in 2024? ›
Growth Projections
The Zacks Consensus Estimate for Lemonade's 2024 earnings per share indicates a year-over-year increase of 13.5%. The consensus estimate for revenues is pegged at $517.09 million, implying a year-over-year improvement of 20.3%.
Is Lemonade trustworthy? ›
While all insurance products offered through Lemonade are trustworthy and reputable, the company's renter's insurance has the best ratings across Lemonade products.
Why is LMND stock dropping? ›
Shares of Lemonade (LMND) are dropping sharply as the company, in a letter to shareholders, outlined a potential drop in profits after “extraordinary challenges” in 2023. The company plans to double its growth budget, which amounted to $55 million in the previous year.
