Summary
- Lemonade is a young, fast (triple digits) growing innovative insurance company. It has very high customer ratings.
- It is disrupting insurance via AI: it handles a major portion of claims through bots, almost instantaneously. And as it gathers more data, its bots improve, like Tesla Autopilot.
- Management notes that its growth is almost linear with marketing spend. Further growth potential comes from new products and international expansion.
- Its growth and use of technology to take on large, existing players are reminiscent of Luckin Coffee, Tesla or Shopify. It could be a long-term multi-bagger.
- But beware the upcoming sequential 50% revenue drop in Q3.
Investment Thesis
Lemonade (LMND) is a recent IPO, one that garnered quite a bit of attention: it is going public while still small and in its high growth phase. A case in point: management said its growth is bottlenecked by its marketing, for which it is seeing almost linear returns on dollars spent.
The company is also founded on the premise of disrupting the (large) insurance industry. As such, and as plenty other IPOs have also experienced, valuations have run up quite a bit at the time of IPO, and the stock now seems to be going through its trough of disillusionment, which means valuations are getting more reasonable.
The means by which Lemonade is disrupting insurance is technology, in particular AI. It is basically automatizing insurance through its bots. This benefits both Lemonade as well as its customers, who give it very high ratings, both due to pricing and customer experience. Moreover, as it captures more data over time, this further improves its bots, not unlike the competitive advantage Tesla (TSLA) bulls ascribe to Autopilot. Improved bots means the company becomes even more efficient, so this works like a virtuous cycle.
While it is not sure how much further the stock will sink in the near term, any additional downside should be welcome for long-term investors. Given its potential to keep growing at high rates for quite some time, this makes the stock reminiscent of Shopify (SHOP), while the business of disrupting existing large players with a "technology substrate" seems akin to Luckin Coffee (OTCPK:LKNCY) and Tesla.
While it is of course by no means guaranteed to which extent the company will succeed, the technological odds seem in its favor. So for investors who missed on Shopify on its way to $100B or Tesla to even higher valuation, investors who don’t want to deal with a delisted company, Lemonade may present an investment opportunity.
However, near term, Q3 is going to present a quite important point for the stock: Lemonade has guided to a sequential 50% drop in GAAP revenue. While the underlying business is not changing (for example, in-force premiums is forecast to continue to grow), Q3 marked the start of a reinsurance policy change, which is changing the GAAP earnings/accounting.
Since high-growth companies are mostly valued based on P/S, a 50% revenue drop implies that already elevated ~40x forward multiples will become ~80x. While as noted the underlying business isn't changing, it is obviously highly uncertain how the stock will react to these results.
