Insurance technology company Lemonade (LMND -1.93%) was a big loser in 2021, shedding 66% of its value. It's not off to a great start in 2022, already down 16% as of this writing.
But if you take a look at the business, you might be more impressed than the stock price indicates. Will 2022 offer a chance for the stock price to catch up to Lemonade's potential? Let's take a deeper look.
Brimming with potential
Lemonade was a highly anticipated initial public offering (IPO) in June 2020 thanks to its use of artificial intelligence to greatly streamline the claims process. It's a disruptive company gaining a huge following in a massive and mostly undisturbed market, which is an exciting prospect. It has racked up more than 1 million customers in about four years, thanks to a digital focus and low-priced approach that's resonated with its millennial target market. And as a B-corporation, it has a do-gooder aspect; customers get to give what's left from their premium at the end of the year to a charity they can choose.
Image source: Getty Images.
It's not surprising that the stock took off roaring, gaining nearly 140% by February 2021.
It began to fall after the 2020 fourth-quarter earnings report, when it looked like growth didn't necessarily justify valuation, and it tanked after the 2021 first-quarter report, when its loss ratio shot up after a brutal winter in Texas, one of its largest markets.
All the while, Lemonade was posting high growth, with in-force premium -- its top-line metric for policy growth -- increasing around 90% year over year each quarter, and premium per customer growing as well. It also launched life insurance and car insurance last year, so it was far from a quiet year.
Management's strategy is to acquire customers when they're just starting their insurance journey, perhaps renting their first apartment, and then keeping them loyal while their needs grow -- for example, buying their first home and taking a term life insurance policy. The growth in premium per customer indicates that this is working, and management says that the renters category is decreasing as a part of the whole.
Now that Lemonade has rolled out its biggest launch yet in the form of auto insurance, what's the plan for 2022?
The most important word: scaling
Lemonade has made a splash in the world of insurance, and it's time to move past its growing pains. If it's as competitive as management believes, the next step is scaling its products and decreasing its losses. It's tacking on an extra $30 million in losses with its acquisition of auto insurance company MetroMile, but that purchase allows it expand much more quickly, gaining more customers and revenue as it rolls out its product in more states.
CEO Daniel Schreiber reiterated in the third-quarter conference call, "We aim to grow fast and capture as much market share, mind share and a larger geographical footprint as possible. If we were to reverse that, we would have a finely honed business but with risk losing the market."
So what should 2022 look like? Lemonade Car rolls out throughout all of the United States, and its other products enter more markets as well. Marketing remains a high cost to enable to best rollout, but revenue increases should outpace it, so losses should begin to contract. More people join as customers, and more customers purchase expanded policies. As this happens, the company has more data points to create more accurate pricing, and the loss ratio declines.
And this should continue into the next few years as well. Schreiber said, "We believe that these are the years for growing customers, growing products, growing markets, growing top line and that really translates into sizable investments that put us cash flow negative." At some point, and unlikely this year, the business should begin to post a profit.
There could be many kinks in the strategy, such as higher-than-anticipated rollout expenses, customers not signing up as quickly as expected, and another climate disaster sending up the loss ratio -- or any other number of scenarios. But 2022 should be another year of high growth, and if you believe Lemonade can make good on its long-term opportunity, keep holding on to your shares.
