Why Wall Street Analysts Think Lemonade Stock Has 372% Upside

Lemonade Inc Making Great Strides to Improve Profitability

In the classic movie Planes, Trains and Automobiles, Steve Martin, playing uptight advertising exec Neal Page, has a memorable line. After facing off with Del Griffith, played by John Candy, Page says, “I could tolerate any insurance seminar. For days I could sit there and listen to them go on and on with a big smile on my face. They’d say, ‘How can you stand it?’ I’d say, ‘Cause I’ve been with Del Griffith. I can take ANYTHING.’”

The point is, for many people, insurance is the zenith of boring. On the plus side, insurance companies make a lot of money. It’s why investing titans like Warren Buffett, Carl Icahn, and Prem Watsa invest in insurance stocks.

Investors often think the insurance industry is fraught with risk because it pays out money to clients. But in-house statisticians make sure that doesn’t hurt the insurance companies’ finances.

The best insurance firms have mastered the fine art of underwriting. That means they almost always take in more in insurance premiums than they spend on insurance claims. Those premiums are the main reason insurance stocks do so well.

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The difference between the premiums received and the claims paid out is called the float. Insurance companies invest the float however they want.

In a nutshell, you’re basically giving insurance companies an interest-free loan. If you never make a claim, you didn’t just give them an interest-free loan, you gave them a donation.

No other business in the world operates this way. Even banks have to provide you with a little interest.

Admittedly, insurance companies can experience growing pains in their early days as they work to lower their risk and increase their profitability. But once the kinks are worked out, the money-printing presses run non-stop.

One insurance company that investors should pay attention to is Lemonade Inc (NASDAQ:LMND). Through artificial intelligence (AI) bots, the company simplifies the customer experience. It’s also expanding its insurance categories and working to lower its loss ratio (I’ll get to why loss ratio is so important later).

About LMND Stock

Lemonade Inc provides rental, homeowner, car, pet, and life insurance to customers in the U.S., Germany, the Netherlands, and France—and it continues to expand globally. (Source: “Company Overview,” Lemonade Inc, last accessed April 28, 2022.)

What sets Lemonade apart is its AI bot called “Maya,” which allows customers to easily purchase insurance, file claims, and resolve customer inquiries.

Maya can make a quote in 90 seconds and it can assess and pay a claim in under three minutes. These kinds of metrics explain why many customers have been leaving big insurers in favor of the smaller, friendlier Lemonade Inc. In the fourth quarter of 2021, the company’s customer accounts increased by 43% year-over-year to 1.4 million.

Lemonade’s big data and AI technologies have helped it carve out a niche in home and pet insurance. But to make more of a splash, the company needed to expand into other lucrative areas.

That’s why, in November 2021, Lemonade acquired Metromile Inc (NASDAQ:MILE). Through the $500.0-million deal, Lemonade gained instant access to Metromile’s AI-powered technology for car insurance. (Source: “Lemonade to Acquire Metromile,” Lemonade Inc, November 8, 2021.)

Metromile Inc’s car-mounted precision sensors have covered billions of miles, sending real-time streaming data to Metromile’s cloud. The data is mapped into driving behaviors (time, distance, where, when, how well, etc.) and cross-referenced with actual claims data.

This machine learning helps Metromile determine risk behavior, increase efficiency, and offer lower premiums.

Lemonade Inc’s acquisition of Metromile Inc dovetailed perfectly into Lemonade’s newly launched auto insurance division, Lemonade Car. With the acquisition, Lemonade incorporated Metromile’s 49 state licenses, more than $100.0 million of in-force premiums (the aggregate annualized premiums from customers), and more than $250.0 million in cash.

The deal is expected to close in the second quarter of 2022.

Lemonade Inc’s Q4 Revenues Double

For the fourth quarter ended December 31, 2021, Lemonade announced that its revenue doubled year-over-year to $41.0 million. (Source: “Shareholder Letter: Q4 2021,” Lemonade Inc, February 23, 2022.)

The company’s fourth-quarter in-force premiums increased by 78% year-over-year to $380.0 million. The increase was partly due to the 43% rise in the number of its customers and the 25% rise in the premium per customer.

During the fourth quarter of 2021, Lemonade Inc’s premium per customer increased to $266.00, up from $177.00 in the fourth quarter of 2020, which was a record year. Management said it expects to beat the record again in the coming years due to the newer products and bundles it offers.

The company’s fourth-quarter gross profit inched up by four percent year-over-year to $7.8 million, its adjusted gross profit increased by 33% year-over-year to $12.6 million, and its gross earned premiums rallied by 79% to $89.0 million.

Lemonade Inc reported a fourth-quarter net loss of $70.3 million, or $1.14 per share, compared to a fourth-quarter 2020 net loss of $33.9 million, or $0.60 per share.

The company’s fourth-quarter 2021 adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss was $51.2 million, compared to a fourth-quarter 2020 adjusted EBITDA loss of $29.7 million.

Lemonade Inc ended the fourth quarter of 2021 with cash and cash equivalents of $1.1 billion, compared to $578.0 million at the end of $2020.

The company’s fourth-quarter gross loss ratio was 96%, up from 77% in the prior quarter and 73% in the fourth quarter of 2020. Management noted that the increase in the loss ratio was a result of its evolving business mix.

Lemonade Inc’s underwriting profitability is expected to improve from its new lines of business. The company entered 2021 with no auto insurance assets and exited the year with the acquisition of Metromile.

Lemonade Car is off to a strong start in Illinois, with roughly 75% of Lemonade Inc’s customers bundling it with at least one of the company’s other insurance policies.

The sales generated by Lemonade Car in Illinois in the fourth quarter of 2021 represent a more than 300% increase relative to the same-period sales following the launch of “Lemonade Pet” in Illinois.

Why Loss Ratio Is So Important

Loss ratio is an important metric for insurance companies. The ratio indicates how financially stable an insurance company is. The lower the loss ratio, the more money an insurance company keeps.

Say an insurance firm earns $10.0 million in premiums, pays $5.0 million in claims, and spends $1.0 million adjusting those claims. To determine the loss ratio, you add the claim payments to the adjustment expenses and divide by the total premiums.

The above example would be (5,000,000 + 1,000,000) / 10,000,000 = 0.6. That means the company used 60% of its premium earnings to pay for losses.

Insurance companies like to see their loss ratio in a range of 60% to 70%, which is tough to do.

Lemonade Inc has said its ongoing business projects should help it improve its underwriting profitability and get the loss ratios of all of its product lines below 75%.

The company said, “…in the near term it’s possible we’ll see quarters with loss ratios above this level as our newer lines mature. This is to be expected, and is a natural and temporary cost of launching and scaling new products.” (Source: Ibid.)

Wall Street Increasingly Bullish on Lemonade Stock

Investors love Lemonade Inc’s increases in revenue, in-force premiums, premium per customer, and total customer accounts. But they’re less enthralled with the company’s higher loss ratio. With its enhanced business offerings, that too shall pass.

As of this writing, LMND stock is down by:

  • 25% over the last month
  • 30% over the last three months
  • 68% over the last six months
  • 78% over the last year

Wall Street analysts think Lemonade Inc’s long-term outlook is bright, and that Lemonade stock is compelling after its recent sell-off.

Of the analysts providing a 12-month price target for LMND stock, their average estimate is $40.50 and their high estimate is $95.00. This points to potential gains in the range of 101% to 372%.

Chart courtesy of StockCharts.com

Analyst Take

Upstart Lemonade Inc’s AI and machine learning technology has injected a breath of fresh air into the staid insurance industry. The company’s enhanced customer service experience and quick and efficient processes are seeing it take customers away from its larger peers.

Expanding its offerings into new insurance categories should help drive sustainable revenue growth and underwriting profitability, which could lead Lemonade stock to go up.