Headquartered in New York, Lemonade (LMND) offers various types of insurance through an online portal. I am neutral on the stock.
When life gives you lemons, make lemonade out of them. That’s an old saying about making the best of life’s difficult circumstances, and holding Lemonade stock with confidence in 2022 has certainly been difficult.
Part of insure-tech is tech, and this hasn’t been a great year for technology stocks in general. Plus, with high inflation forcing some families to choose food and rent over insurance, Lemonade’s outlook looks hazy. On the other hand, Lemonade is apparently ready to buy out a business with a unique approach to providing auto insurance.
Granted, Lemonade’s seemingly imminent acquisition of an auto insurance upstart is news-worthy and might be exciting for Lemonade’s shareholders. Yet, any excitement should be tempered with caution as this is a good time for Lemonade to ease up on spending, not put the pedal to the metal.
Going the Extra Mile
Shockingly, Lemonade stock has slid from a 52-week high of $115.85 to less than $17 per share. Clearly, the company and its stakeholders could use a positive catalyst right now – and just maybe, there’s one on the horizon.
While Lemonade offers various types of insurance (including renters, homeowners, life, and even pet insurance), a major part of the company’s business is automobile insurance. Lemonade’s auto insurance offerings, like the company’s other insurance services, leverage artificial intelligence (AI) and behavioral economics for enhanced efficiency and, hopefully, fair pricing.
While Lemonade’s auto insurance services are already non-traditional, a potentially imminent acquisition could bring a whole new dimension to the company’s approach to automotive insure-tech. Specifically, it’s been reported that Lemonade is preparing to buy out Metromile (MILE) by the end of this month.
Apparently, this acquisition has been telegraphed since at least November. At last, it looks like the deal might actually be finalized – or so we can hope. So, what is Metromile, and why would Lemonade want to acquire it?
According to Metromile, the company uses “car-mounted precision sensors,” cloud computing technology, and AI to provide “real-time, personalized auto insurance policies by the mile instead of the industry’s reliance on approximations that have historically made prices unfair.” This allegedly results in annual average savings of 47% compared to what customers paid their previous auto insurers.
It’s not hard to see how Metromile’s technology can help Lemonade go the extra mile in providing automotive insurance to its customers. As Lemonade co-founder and CEO Daniel Schreiber explained, Metromile’s “proprietary data and machine learning algorithms can vault us over the most time and cost-intensive parts of the journey.”
A Pricey Proposition
It sure seems like a perfect fit, doesn’t it? After all, Lemonade stands to gain Metromile’s 49 state licenses and over $100 million of seasoned in-force premium, among other benefits. This could only be a win-win scenario, right?
Yet, cautious investors should consider the full picture here. While Metromile will undoubtedly provide value with its technology, it will cost Lemonade around $500 million to acquire the company. Can Lemonade afford to spend half a billion dollars on Metromile?
As usual, the answer lies within the fiscal data. During 2022’s first quarter, Lemonade incurred a net loss of $74.8 million. That’s significantly worse than the already worrisome $49 million loss from the year-earlier quarter.
Year-over-year, Lemonade ramped up its spending in multiple categories, including sales and marketing, technology development, and general and administrative. Consequently, the company’s Q1-2022 total expense was $116.9 million, even as the company only generated $44.3 million in quarterly revenue.
Now, it’s time to pretend you’re Lemonade’s accountant and ask yourself a question: does it make sense for the company to spend roughly $500 million to acquire Metromile, or should Lemonade instead curb its spending? Maybe, Lemonade can buy out Metromile while also reducing expenditures in areas like sales and marketing – yet, there’s no specific indication that Lemonade’s management wishes to cut costs in this expense category.
It’s also worth noting that Lemonade stock has lost much of its value since November when the market was apprised of Lemonade’s plan to acquire Metromile. Perhaps the investing community is sending a clear message: The Metromile buyout is fine, but it won’t solve Lemonade’s financial issues in the long run.
Wall Street’s Take
Turning to Wall Street, LMND comes in as a Moderate Buy based on four Buys, one Hold, and two Sell ratings. The average Lemonade price target is $27.71, implying 64.6% upside potential.
The Takeaway
It’s perfectly reasonable to believe in Lemonade’s disruptive approach to insurance. Leveraging leading-edge technology to better serve customers is both smart and commendable.
However, Lemonade’s management should consider implementing some cost-cutting measures in order to steer the company’s bottom line toward break-even and, eventually, profitability. It’s debatable whether the seemingly imminent Metromile buyout will help or hinder that objective. Therefore, prospective investors should consider taking a neutral stance and refrain from holding Lemonade stock for the time being.
