LMND Stock: Can Lemonade Stage a Comeback In 2022?
April 21 2022 - 6:05AM
Finscreener.org
If a stock has fallen almost 75%
in the last year, is it a good buy? Does the fall represent
overselling, or were the companyU+02019s fundamentals shaky, to
begin with? Many investors ask similar questions of
Lemonade (NYSE: LMND),
the
new age fintech insurer
that has seen its shares drop in the
last 12 months.
Lemonade uses a mix of artificial
intelligence and behavioral economics to cut out the sales agent in
the insurance business. This helps insurance companies acquire
customers at a much lower cost. In addition, its AI could eliminate
the need for an expensive, commission-based insurance agent.
However, Lemonade’s losses are mounting, and from the looks of it,
they won’t stop anytime soon.
How did Lemonade perform in Q4 of 2021?
The company reported revenue of
$41 million for Q4 of 2021, up 100% from $20.5 million in the
year-ago period. Lemonade’s revenue growth pushed operating
expenses to $84.5 million in Q4, compared to $44.6 million in Q4 of
2020.
The major expenses were in sales
& marketing, tech development, and general & administrative
costs. As a result, the net loss for Q4 2021 was $70.3 million
compared to $33.9 million in the corresponding quarter of
2020.
One major positive for Lemonade
is that the company closed 2021 with cash and equivalent balances
of over $1 billion.
Apart from the cash, 2021 also
saw Lemonade Car, an auto insurance product, take off. The company
said, “Lemonade Car is off to a strong start in Illinois, with
about 3/4 of Lemonade Car customers bundling it with at least one
other Lemonade policy.”
Lemonade is unique in the
insurance tech space because it offers car, home, life, pet, and
renters’ insurance on its platform. Most other insurtechs provide
only one product.
Lemonade got into auto insurance
after acquiring Metromile. Its auto insurance product is different
because Metromile had another way of calculating insurance
premiums. Generally, one’s premium is calculated based on the
carU+02019s age, the country you live in, and your traffic/driving
record.
However, Metromile decides its
premiums based on how many miles a car has been driven. According
to the company, its premiums save people up to 47% in the long run.
So in an age where people are driving very little, Lemonade’s
offering might be attractive.
LMND stock is trading at a discount
What one needs to remember about
Lemonade is that it is a growth stock. And growth stocks tend to
lose money for a long time. Smart investors know that losses can be
digested as long as revenues keep rising in tandem. The danger is
when losses go up, but revenues don’t. As of now, Lemonade’s
revenues are keeping pace with its rising losses.
A significant revenue booster for
Lemonade could be its auto insurance. The acquisition of Metromile
gives it access to 49 states where Metromile is already licensed.
This is a shortcut (in terms of time) to all the markets it can
enter.
The biggest challenge for
Lemonade is to control its gross loss ratio. Q4 2021 saw this come
in at a mind-boggling 96%. The gross loss ratio is the percentage
of premiums that is paid out as claims.
If an insurance company is paying
out nearly all of its premium, there will be very little left to
support operating expenses. And the scary part about this payout is
that Q4 didn’t see any major natural event that required money to
exit the system. This points to a management challenge that is not
reassuring for investors.
The company closed trading on
April 18 at $22.54. Analysts have given LMND stock a target of $39,
a potential upside of over 73% from its current levels.
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