Investors gave Lemonade (LMND +4.13%) 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%.
NYSE: LMND
Key Data Points
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.
