LMND: Should You Buy the Dip in Lemonade Stock?

Author: Finscreener

Estimated read time: 3 minutes

Publication date: 24th Nov 2021 11:34 GMT+1

Shares of insurance technology company Lemonade (NYSE: LMND) are currently trading at $51.59 which is 72% below its all-time highs. The company is currently valued at a market cap of $3.2 billion and presents investors with an opportunity to buy a growth stock at a lower multiple.

Let’s see if LMND stock should be part of your portfolio right now.


Why is LMND stock down in the last month?

Lemonade stock is trading lower in recent sessions after the company reported its Q3 results and disclosed the acquisition of Metromile (NASDAQ: MILE) in an all-stock transaction valued at $500 million. In the third quarter of 2021, Lemonade reported revenue of $35.7 million and a loss of $1.08 per share. Comparatively, analysts forecast revenue of $33.4 million and a loss of $1.16 per share in Q3.

In the quarter ended in December 2021, Lemonade forecast sales between $39 million and $40 million with an adjusted EBITDA loss of between $52 million and $50 million. Wall Street forecast sales of $39 million in Q4 for LMND stock. In Q3, Lemonade increased sales by 101% year over year but its net loss widened to $66.4 million, up from $30.9 million in the prior-year period.

While the acquisition of Metromile will allow Lemonade to gain traction in the auto insurance segment, the former is also booking heavy losses. Further, the all-stock deal will dilute shareholder wealth at an accelerated pace. Metromile is a much smaller company compared to LMND but its adjusted loss of $48 million in Q2 was similar to Lemonade.


What next for Lemonade investors?

In the last year, Lemonade’s revenue growth has been misleading as the company changed its business model. In Q3 of 2020, the company launched reinsurance agreements where it surrenders 75% of premiums to reinsurers for a 25% commission for every dollar it ceded. 

Though it generates lower revenue for LMND, the business model is likely to improve the company’s gross margins while reducing capital requirements. So, now investors should look at different metrics to analyze Lemonade’s growth story.

Lemonade ended Q3 with a customer base of 1.36 million, which was 45% higher compared to its year-ago figure of 941,000. We can see that Lemonade’s artificial intelligence-powered platform is attracting insurance buyers at a robust pace. The company also confirmed its life insurance and pet insurance services are drawing first-time buyers, allowing it to diversify from verticals such as homeowners and renters insurance.


Is more shareholder dilution on the cards?

In fiscal 2020, Lemonade reported a net loss of $122.3 million. In the first three quarters of 2021, its net loss widened to $171 million. We can see why investors were not too enthused by the company’s takeover of Metromile.

Lemonade’s outstanding share count has more than doubled year to date and this trend is likely to continue in the future. The company ended Q3 with just $427 million in cash and no debt. Comparatively, its net losses are forecast to widen from $3.93 per share in 2021 to $4.45 per share in 2022. Given its share count of 63.6 million, total losses next year will be close to $300 million. And this is without accounting for the acquisition of Metromile.


The final takeaway

LMND stock remains expensive despite the significant decline in the last three months. Analysts expect the company’s sales to rise by 34.6% year over year to $127 million in 2021 and by 69.5% to $215.34 million in 2022. If we add Metromile’s revenue estimates of $85 million, the stock is still valued at a price to 2022 sales multiple of 8x which is extremely steep.

Lemonade shares might regain momentum especially if the company can successfully integrate the two businesses, lower costs and benefit from synergies over the long term.

Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.