Insurance innovator Lemonade (LMND) recently posted Q2 results that beat top-and-bottom-line expectations, yet its stock have seen a 25% drop due to a softer revenue forecast for Q3. However, this doesn’t tell the whole story. The company’s gross earned premium has significantly increased, indicating a solid surge in customer base and market penetration, a trend expected to continue.
Lemonade’s position in the insurance industry is amplified by its utilization of AI and machine learning, positioning it for potential upside as it continues to expand its market presence. The recent downturn in share price may present a buy-on-the-dip opportunity for long-term investors.
Lemonade Turns the Corner on Net Cash Flow
Lemonade is a pioneering insurance provider that uses advanced technologies such as artificial intelligence and machine learning to deliver services for renters, homeowners, car, pet, and life insurance. Its approach eliminates paperwork and streamlines processing, disrupting traditional insurance practices.
Despite a challenging period marked by widespread losses due to catastrophe exposure (CAT), the company has successfully driven loss ratios down to 79% in the most recent quarter, reflecting a 15% year-on-year improvement.
This progress has been attributed to management’s concentrated efforts on reducing CAT volatility, realized through expanding lower CAT exposure products like pet and renters insurance, geographic expansion including recent homeowners insurance launches in the UK and France, and strategic selling of Lemonade homeowners insurance in the U.S where the company’s AI forecasts promising LTVs.
Lower loss ratios tend to indicate better profitability and earnings over time, likely helping the company turn the corner and become net cash flow positive. Management has indicated that this should continue consistently moving forward.
Lemonade’s Recent Financial Results
Lemonade’s Q2 2024 results exceeded expectations. Revenue of $122.00 million beat analysts’ estimates of $121.77 million and marked a considerable 22% year-over-year increase. In-force premium saw a 22% year-over-year increase to $839 million, while the premium per customer grew by 8% year-over-year to $387.
The gross loss ratio was reduced to 79% from 94% in Q2 of 2023. The impact of catastrophes accounted for about 17% of the gross loss ratio. Excluding catastrophe impacts, the underlying gross loss ratio was 62. The quarter’s net loss was $57 million, driving earnings per share (EPS) of -$0.81, which beat the consensus expectation of -$0.88.
Total cash, cash equivalents, and investments for the quarter amounted to approximately $931 million, reflecting a positive net cash flow trend. This is a significant contrast to the net use of cash of $51 million in the same quarter of the prior year.
Management has given guidance for Q3 and FY 2024. For Q3, the in-force premium ranging from $875 million to $879 million is predicted, along with gross earned premiums between $208 million and $210 million. The projected revenue is between $124 million and $126 million, along with an expected EBITDA loss of $58 million to $56 million, below consensus expectations. For FY 2024, in-force premium is projected to range between $940 million and $944 million, the gross earned premiums between $818 million and $822 million, and revenue standing between $511 million and $515 million, in line with consensus estimates on the high-end.
What Is the Price Target for LMND Stock?
The shares are highly volatile, sporting a beta of 3.05. However, the stock shows positive signs of recovery from a multi-year slide to post a 3% return year-to-date, despite the most recent downward spike, the stock trades near the middle of its 52-week price range of $10.27 – $24.55 and shows negative price momentum, trading below its 20-day (19.98) and 50-day (18.78) moving averages. Based on a P/B ratio of 1.86x, the shares trade in line with the Property & Casualty Insurance industry average of 1.85x.
Analysts covering the company have taken a cautious stance on the stock. Based on the recent recommendations and price targets issued by six analysts, Lemonade is rated a Hold. The average price target for LMND stock is $21.20, representing a potential 27.56% upside from current levels.
Bottom Line on LMND
Despite a recent drop in shares due to a softer Q3 revenue forecast, Lemonade has demonstrated remarkable resilience and potential for growth. The company’s insurtech approach, utilizing AI and machine learning, has enabled a significant increase in gross earned premiums and has also been crucial in lowering its loss ratios. The company’s advances are paving the way for a more profitable future, as shown by positive trends in net cash flow. Although near-term expectations warrant a cautious approach to the stock, there is an undeniable buy-on-the-dip opportunity present for long-term investors.
