Is Lemonade Stock a Sweet Deal Down 87%

When insurance technology firm Lemonade first debuted on the markets at an official price of $29 before soaring to $66 per share, it was caught up in a frenzy of bullish speculation that subsequently led the stock to rally to $183 per share.

But the excitement wasn’t to last and now the share price sits about 85% lower. So perhaps overly enthusiastic market sentiment has finally given way to reality and the market is pricing the stock well, or even below fair value?

Is it time to buy Lemonade stock?

Key Points

• Lemonade’s customer base expanded from 1.4 million to 1.9 million while revenues rose 59% YoY.
• Despite revenue growth, Lemonade is unprofitable, with a Q2 2024 net loss of $65.6 million. 
• Increased competition in InsureTech and high customer acquisition costs challenge profitability. 

Lemonade Is Tastier Than Ever

In its most recent earnings release, Lemonade reported $104.6 million in revenue, marking a year-over-year increase of 59%. The boost in the top line is largely attributed to an increase in gross earned premiums, which rose to $123 million from $81 million in the same period last year.

The concern that has weighed on investors minds persisted, though when in spite of the impressive revenue growth, Lemonade posted another loss. Still, there was a gradual improvement with net loss for Q2 2024 coming at $65.6 million, slightly better than the $67.9 million loss reported in Q2 2023.

On a positive note, the customer base grew to 1.9 million, up from 1.4 million a year ago. Another bullish factor was that Lemonade’s loss ratio improved to 75%, compared to 87% in Q2 2023, which indicated that the company is getting better at managing risk and underwriting policies effectively.

Why Is Lemonade Stock So Low?

With so many factors seemingly going well for Lemonade, why is the share price still down so much?

One reason is that overall market sentiment towards high-growth, unprofitable tech companies has soured compared to the euphoric period in 2020 and early 2021.

So, in spite of the impressive revenue growth, Lemonade is still far from profitable and the ongoing losses have made investors wary about the company’s cash burn rate.

Is InsureTech Good Business?

Equally, it’s fair to say that the insuretech space is becoming increasingly competitive with the entry of new players and traditional insurance companies ramping up their own digital transformation efforts.

Overall, insuretech has lots of promise because it offers more personalized insurance options and so has the potential to capture significant market share from incumbents. The focus on customer experience, driven by AI and machine learning, has resulted in high customer satisfaction and retention rates.

It’s also easier to scale an insuretech firm versus a legacy insurer but it’s not all sunshine and roses.

The challenge of insuretech businesses is that they must often spend heavily on marketing and customer acquisition to build their customer base. Unlike traditional insurance companies with established brand recognition and a loyal customer base, insuretechs need to invest significantly to attract and retain customers and that in turn hurts profitability, which Lemonade is experiencing.

Is Lemonade a Sweet Deal?

As a result, the 7 analysts covering Lemonade are somewhat subdued on the prospects for Lemonade and have a $19.29 per share consensus price target on the firm. However, a multiples analysis signals more reasons to be bullish and places intrinsic value closer to $27 per share, suggesting closer to 19% upside opportunity.