Bull of the Day: Lemonade (LMND)

Lemonade, Inc. LMND is the small-cap insurance platform that offers homeowners and renters insurance principally in the United States, and contents and liability insurance primarily in Germany and the Netherlands, through its full-stack insurance carriers.

In May, the company reported a first-quarter operating loss of $1.21 per share, narrower than the Zacks Consensus Estimate of a loss of $1.43. The loss was however wider than the year-ago loss of 81 cents per share.

The results reflect gross earned premiums improvement, driven by an increase in-force premium earned offset by higher expense.

Fresh Squeezed Premiums

The analyst reactions were typical of many richly-valued software and FinTech companies since the bear market caused a big valuation reset.

JMP Securities analyst Matthew Carletti lowered the firm's price target on Lemonade to $40 from $95 to reflect "broad contraction in multiples across the technology and InsurTech sectors" in recent months. He maintained an Outperform rating on LMND shares.

The analyst observed that recent growth in premium-per-customer and bundling rates show that the company's model is working, but the significant recent changes in market environment that have been punishing growth and tech stocks demonstrate that "investors have become more demanding with regards to paths toward profitability."

And profitability is something that Lemonade is still a long way from squeezing. While the stock has moved into the upper realms of the Zacks Rank because of rising earnings estimates, the consensus for this year projects an EPS loss of $5.40, down 37% from last year.

The good news is on the topline where this year's consensus estimate for revenue of $208 million represents 62% annual growth. And next year is already projected to see a climb above $315 million for a 52% advance.

The recent beat-and-raise quarter gave analysts reasons to boost their outlook. Let's look at the quarter details and the guidance.

Behind the Q1 Headlines

Lemonade revenues increased 88.5% year over year to $44.3 million, driven by an increase in net earned premium, net investment income and commission and other income. The top line beat the Zacks Consensus Estimate by 2.4%.

Gross earned premiums soared 71% year over year to $96 million, driven by an increase in in-force premiums earned. Lemonade's in-force premium of $419 million jumped 66%, driven by a 37% increase in the number of customers as well as a 22% increase in premium per customer.

Premium per customer increased driven by the continued shift of business mix toward products with higher average policy values, increased prevalence of multiple policies per customer, and growth in the overall average policy value.

Total operating expenses, excluding net loss and loss adjustment expense, increased 68% year over year to $92.5 million, attributable to higher sales & marketing, technology development, and general and administrative expenses.

Adjusted EBITDA was negative $57.4 million, wider than negative $41.3 million in the year-ago quarter, attributable to increased operating expenses.

The loss ratio of 89 deteriorated 3100 basis points year over year. Lemonade estimates the loss ratio to be less than 75 in the long term.

Financial Update

Cash, cash equivalents, and investments were $1 billion as of Mar 31, 2022, down from 2021 end level of $1.1 billion, reflecting net proceeds from cash used in operations.

As of Mar 31, 2022, Lemonade had assets worth $1.5 billion, down about 1% from the level at 2021 end.

Shareholder equity at quarter-end was $912.7 billion, down 7.6% from the 2020-end level.

Cash used in operations was $39.5 million, lower than $40.3 million used in the year-ago quarter.

Q2 Guidance

In-force premium at quarter-end is projected between $445 and $450 million. Gross earned premium is expected in the range of $103-$105 million. Lemonade expects revenues between $46 million and $48 million. Adjusted EBITDA loss is expected to be $65-$70 million. Capital expenditure is estimated to be $4 million.

Full-Year 2022 View

Lemonade projects in-force premium between $535 million and $545 million. Gross earned premium is expected in the range of $426 million to $430 million. Revenues are anticipated between $205 million and $208 million.

Adjusted EBITDA loss is expected to be in the range of $265-$280 million and capital expenditure is estimated to be $14 million. Stock-based compensation expense is estimated to be about $60 million.

Bottom line on Lemonade: Insurance is solid business if managed properly. And Lemonade seems to have an angle on growth. It could also be a great acquisition target for a larger player who likes that flavor of growth.

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