There are two main types of companies investors are avoiding this year: those in the technology sector and those serving consumers. Unfortunately for lemonade (LMND 7.14%)the insurance company based on artificial intelligence, is both.
Inflation is elevated, which has forced the US Federal Reserve to raise interest rates aggressively in an attempt to bring them back down to a more normal rate. As a result, consumers are hit by a combination of higher prices for essential goods and services and higher borrowing costs. Tech companies similarly struggle when the cost of capital rises because it’s harder to find cash to fund growth.
But this headwind will not last forever. Lemonade just reported another strong quarterly result for the period ended Sept. 30, and believes it can achieve profitability with the cash it already has. With the stock price down 88% from its all-time high, investors should buy now.
The lemonade difference
Most consumers can point out at least a few things they don’t like about dealing with traditional insurance companies, whether it’s the customer experience or the time it takes to process and pay out a claim. The industry isn’t exactly known for innovation – but then along came Lemonade.
Lemonade developed artificial intelligence (AI) to reengineer customer interactions and the way rewards are paid. Its online bot, Maya, can offer an insurance policy in 90 seconds and pay claims in three minutes without human intervention. The company now operates in five insurance markets: homeowner, renter, life, pet and auto, which is the newest addition.
Lemonade is also breaking new ground outside of America after launching Home Insurance (renters’ insurance) in the UK last third quarter. It follows the company’s previous entry into Germany, the Netherlands and France.
Overall, Lemonade’s unique technology-centric approach is resonating with customers, likely because it aligns insurance with other goods and services consumers are used to buying online quickly, easily, and with a high level of convenience. In the third quarter, the company had over 1.77 million customers, up 30% from the same period last year.
Additionally, the premium per customer rose to another all-time high as more Lemonade customers made multiple purchases.
Lemonade’s eligible award is increasing
Perhaps the most important takeaway from Lemonade’s Q3 report was the 76% increase in applicable premium. It’s the dollar value of premiums for all active policies, and it rose to a record high of $609 million for the period. This was helped by Lemonade’s recent acquisition of AI-powered insurer MetroMile, which boosted earnings by 32 percentage points.
The blockbuster growth rate is also a result of Lemonade’s rapidly growing customer base, as well as the fact that each customer spends increasing amounts of money on the company over time.
One thing that’s worrying investors is Lemonade’s gross claims ratio — the percentage of premiums it pays to cover claims — which was 94% in the third quarter. That’s well above the 75% target level, and it will make it difficult for the company to become profitable if it stays that high. A year ago, it was 77%, and the jump is mostly due to near-term factors like Hurricane Ian in Florida and Lemonade’s acquisition of MetroMile.
Lemonade reported a net loss of $91 million for the quarter, bringing the total net loss for the trailing four quarters to $304 million. But the company sees light at the end of the tunnel because it believes it can become profitable with the cash it has available. That would be a huge benefit for investors because it means they don’t have to endure a dilutive capital raise, especially at Lemonade’s current low share price.
Why Lemonade stock is a buy at dip
Lemonade’s upcoming fourth-quarter results may not be as strong as its third-quarter, as the company has frontloaded some of its marketing efforts to provide a better return on investment. Q4 is said to be typically weak due to seasonality.
But that’s a long-term story. Take Lemonade’s auto insurance business, which it entered just last year, for example. It’s a $316 billion annual opportunity in the U.S. alone, which leaves plenty of room for growth compared to the company’s overall existing premium.
Also, Lemonade just agreed to a deal Tough, a retailer of pet products, to offer Lemonade pet insurance to its 20 million customers. The partnership is set to begin in 2023 and could provide a positive boost to Lemonade’s customer base.
All in all, Lemonade has an exceptional growth path ahead of it. The risk is that it doesn’t generate profits as intended in the near term, but this weak economy and dovish tone towards tech companies won’t last forever. If it can survive these conditions, it may find itself in a more favorable position in a year or two.
With Lemonade stock down 88% from its all-time high, the risk-reward equation could make sense to investors here.