Lemonade: Blistering Revenue Growth With A Juicy Valuation (NYSE:LMND)

Marko GeberLemonade (NYSE:LMND) is an Insurtech firm that goals to disrupt the incumbent insurance coverage trade, which has been dominated by a number of humongous billion-dollar gamers for many years. The firm was based in 2015 by Daniel Schreiber and Shai Wininger (who was the Co-Founder) of Fiverr and had its fanfare IPO in April 2021. The story was easy, “delight clients” with a speedy AI-powered expertise, develop quick, and disrupt the large market. So far the enterprise has been rising quick with income rising by 10 instances since 2017. In the third quarter of 2022, the sturdy outcomes continued as the corporate’s Inforce Premium (which you’ll consider as “annual recurring income”) elevated by 76%. Despite these components, the corporate’s inventory worth has plummeted by 87% since its highs in April 2021, which has been primarily pushed by the macroeconomic setting and loss ratio spikes pushed by excessive climate occasions. In this put up, I’m going to interrupt down Lemonade’s market alternative, enterprise mannequin, financials and valuation. This put up additionally contains extracts from an Interview I did with Lemonade’s Chief Financial Officer [CFO] Tim Bixby, let’s dive in. Data by YChartsHuge Market Opportunity To provide you with an thought of the sheer measurement of the incumbent insurance coverage trade, let’s dive into a number of of the most important gamers. State Farm is the most important auto insurer in the usand a large within the property/casualty insurance coverage market. The firm was based in 1922, has ~58,000 workers, and wrote ~$70 billion in premiums in 2021. Lemonade by comparability has ~1,000 workers and ~$600 million in inforce premium figures for Q3 (which is not an actual comparability) however you get the thought, that is David vs Goliath. Then if we go down the listing under you see Warren Buffett’s Berkshire Hathaway ($51.6 billion in premiums), Progressive Corp ($48 billion), Liberty Mutual ($41.5 billion) and so on. Keep in thoughts this is only one class, the Property/Casualty market, this does not embrace auto insurance coverage, life insurance coverage, and all the opposite classes. The level is the insurance coverage market is gigantic and is primed for disruption. Largest Insurance firms (1)AI Business Model Lemonade plans to disrupt the large insurance coverage market by its Tech-powered resolution which goals to “delight clients” with its quick and low-cost service. For instance, the corporate famously claimed to be 5 instances cheaper than an incumbent insurer and save clients “80% inside 90 seconds”. In my interview with the CFO of Lemonade Tim Bixby, on my YouTube channel Motivation 2 Invest. I requested if it was attainable to get a full coverage so quick and he confirmed that “nearly 100% of the time” a full coverage may be achieved in a “matter of minutes”. The motive Lemonade can accomplish this, is it would not use a military of human brokers as you’ve got at incumbent insurance coverage firms. Lemonade makes use of Artificial Intelligence [AI] powered chatbots to take the enter data, assess threat and underwrite insurance policies. In Lemonade’s investor day presentation (November 2022), the corporate showcased its numerous AI bots as a “neural web” picture. “AI MAYA” is the shopper expertise Bot that takes inputs from customers. Then when a buyer needs to make a declare, they converse to “AI JIM” the claims expertise bot. Its AI Jim bot takes what known as a primary discover of loss (FNOL) for 98% of claims, and manages ~45% of the method finish to finish, with “larger accuracy than people”, based on Lemonade. Behind the scenes, there’s an inside course of supervisor bot (COOPER) and even Forensics Graph to assist predict fraud. Its Fraud detection algorithms have up to now flagged over $100 million in fraudulent claims and has detected doctored paperwork in $12 million price of claims. Lemonade AI Bots (Investor Day Presentation November 2022)Lemonade additionally now makes use of a platform known as “Watchtower” to trace wildfires and excessive climate in a area. This then automates the “halting” of selling and initiates a delayed begin date for brand spanking new insurance policies. I consider using this platform is in response to the acute Texas Winter Storm Uri (February 2021) which brought on a large quantity of payouts to be filed with Lemonade after enormous harm hit the area. Although payouts are part of the insurance coverage recreation, monitoring threat and publicity is important for profitability. Lemonade began with Renters Insurance however has since expanded to Home, Car, Life, and even Pet Insurance. On the Motivation 2 Invest YouTube Channel, I requested Tim Bixby, Lemonade CFO, why they’ve jumped into many classes. He revealed some attention-grabbing insights in regards to the trade. “The renters market was unloved by the trade, as a result of it was tough to generate income, as a result of low premium” – Lemonade CFO Tim Bixby Lemonade’s aggressive benefit was its “decrease value construction” which enabled it to enter the market at a lower cost than incumbents as they’ve many overheads. Renter’s insurance coverage is then seen as a “gateway coverage” to bigger markets with larger premiums. Lemonade’s technique is to “develop with its buyer” all through their complete lifecycle. For instance, a younger “Gen Z” will possible begin renting earlier than shopping for a house, a automotive, a pet, after which lastly life insurance coverage as they increase a household and so on. I personally assume this mannequin is genius and makes quite a lot of sense, as upsells develop into extra pure. Insurance Types (Lemonade Insurance Types) Third Quarter Financials Lemonade generated stable monetary outcomes for the third quarter of 2022. In Force Premium which you’ll consider as Annual Recurring income elevated by a speedy 76% yr over to $609 million, which beat administration’s prior steering of between $595 million and $600 million. Revenue elevated by 107% yr over yr to $74 million. This was pushed by a rise in Gross Earned Premium (elevated by 71% yr over yr) and a discount in premium ceded to reinsurers. Total Customers have been 1.78 million and has elevated by a stable 35% yr over yr. When Lemonade first had its IPO it was focusing extra buyer progress however administration has since pivoted its technique to focus extra on rising the share of pockets of the patron by upsells and cross-sells. For instance, Lemonade reported Premium Per Customer of $343 million which elevated by a speedy 35% yr over yr. Lemonade (Q3 Earnings date)Its progress in Premium Per Customer was primarily elevated on account of the Metromile Acquisition, within the second quarter of 2022. Lemonade paid ~$145 million in inventory for the Auto insurance coverage firm which had $155 million in money and $110 million in automotive premiums. This personally appeared like a unbelievable deal for Lemonade and I needed to ask Lemonade CFO Tim Bixby how they obtained such an excellent deal, right here is his response. “Timing is the whole lot…we began chatting with Metromile about one yr in the past” “We created a ratio on the worth of Metromiles inventory vs our inventory then when the market corrected…that ratio was nonetheless intact”. – Lemonade CFO Tim Bixby. Metromile is an auto insurance coverage firm that pioneered the utilization of telematics to trace “good” and “unhealthy” drivers. The energy of this monitoring allows clients to regulate their driving habits to save cash on their insurance coverage coverage. Metromile has 100,000 clients and has racked up 500 million miles of driving information. Therefore Lemonade noticed this as a helpful a part of the acquisition. In addition, a barrier to progress within the insurance coverage trade is state-by-state regulation and approval. The acquisition of Metromile has helped to speed up the variety of states Lemonade’s auto insurance coverage product was in from 3 states to 10 states. Lemonade Car Insurance (Investor Day Presentation November 2022)I queried Lemonade’s CFO Tim Bixby in regards to the challenges Metromile was dealing with and attainable causes the corporate needed to promote. Metromile had confronted “challenges with buyer acquisition” and the small measurement of the corporate made it laborious for them to “proper measurement” and “get loss ratios in the suitable place”. Therefore as Lemonade has developed an economical buyer acquisition technique, bringing the businesses collectively made quite a lot of sense. Big Data Advantage and LTV Model For these fascinated about Digital Marketing and Localization Marketing, you’ll love this subsequent part. Lemonade has an LTV to CAC (lifetime worth to Cost of Customer Acquisition) ratio of three.15X. According to many Venture Capitalists, an LTV to CAC ratio larger than three is good for sustainable progress because it means the corporate is rising profitably. Lemonade has developed a state-of-the-art Lifetime Value Model to assist predict buyer churn. As 100% of Lemonade’s clients are digitally enabled the corporate has a bonus over incumbent insurance coverage firms which have many purchasers signing up by way of an agent. Lemonade collects ~1,800 information factors on every buyer which helps to extend the accuracy of the mannequin. As extra information is collected, the mannequin accuracy is improved and it may be used on the shopper acquisition facet to amass clients that are more likely to be extra worthwhile long run. These LTV fashions govern 86% of Lemonade’s advertising spend and is a key aggressive benefit for the corporate. LTV Model Lemonade (Investor Presentation November 2022)Pet Partnerships Approximately 80 Million households in the ushave pets however simply 2.5% have Pet Insurance, subsequently there’s a important market alternative. Pet Insurance (pink bars on chart under) makes up ~58% of cross-sells. In addition, this absolute cross-sell premium for pets has enhance by 92% yr over yr to $25 million. Cross Sells (Investor Presentation November 2022)As a facet observe, I personally see the love folks have for his or her pets and sometimes they’re thought-about a part of the household. “Pandemic pets” was a secular pattern that exploded in 2020, as folks sought the unconditional love solely a pet can provide. A couple of months again I requested Lemonade CFO Tim Bixby a few “partnership technique” as in my eyes this made sense given its competitor Root had partnered with Carvana for auto insurance coverage. After which it was nice to see Lemonade scored a pet insurance coverage partnership with Pet e-commerce large Chewy, an organization with 20 million clients and a $17 billion market capitalization. In Spring 2023, Chewy (CHWY) will begin to promote Lemonade Pet insurance coverage insurance policies as a part of its CarePlus Pet well being program. The lovely factor about this partnership is Chewy’s income share shall be paid out totally in lemonade inventory, which ought to assist to scale back the money burn for lemonade and enhance profitability. Lemonade believes this might develop into one of many main progress channels sooner or later. UK Expansion Lemonade is at the moment out there within the U.S.A, Germany, Netherlands, and France. In my interview with CFO Tim Bixby, I requested about enlargement alternatives within the U.Ok. Recorded a few months again the corporate had “no formal bulletins” however as of the third quarter, Lemonade has introduced to be launching within the U.Ok, which is the most important insurance coverage market in Europe. Loss Ratio Trends The “Loss Ratio” is a typical metric used within the insurance coverage trade to calculate the profitability of an organization’s endeavor. It is calculated by taking the Losses incurred in Claims plus adjustment bills divided by premiums earned for the interval. Generally, decrease is best and a “good” insurance coverage firm has a loss ratio of between 40% and 60%, though it relies upon upon the coverage sort. Loss Ratio Formula (Wall Street Mojo)Lemonade is within the early phases of scale and thus has a reasonably excessive gross loss ratio was 94% for Q3,22 which is up from 77% in Q3 2021 and 86% in Q2 2022. The loss ratio had beforehand been coming down however this spike was attributable to the Metromile deal (which was anticipated) and Hurricane Ian which added a number of factors of enhance to this ratio. Management believes these are quick time period components and the loss ratio shall be on an “overarching downward pattern” with “occasional bumps”. With that stated, we do anticipate the overarching downward pattern to proceed within the coming quarters, however the “occasional bumps”. Gross Loss Ratio (Q3,22 Report)The Insurance trade is notoriously difficult to make worthwhile as something can occur on the earth, together with black swan occasions. Even the genius Warren Buffett struggled to make Berkshire Hathaway’s insurance coverage phase persistently worthwhile till he employed Indian-born Ajit Jain, who Buffett praises for turning that a part of the enterprise round. For instance, in a Book on Warren Buffett known as the “Snowball”, Buffett is alleged to have forecasted a possible terrorist assault and did not tackle as a lot insurance coverage threat for the dual towers previous to the assault. Despite this distinctive forecast, Berkshires subsidiaries nonetheless took a $1.5 billion hit to earnings, which represents the challenges within the trade. Operating Expenses Lemonade reported Operating Expenses of $110 million within the third quarter of 2022, which elevated by 33% yr over yr. This was primarily pushed by headcount bills, authorized charges and as partially offset by decrease gross sales and advertising bills. Lemonade generated earnings per share of adverse $1.37, which missed analyst estimates barely by $0.01. The firm insists it’s on a “path to profitability” and goals to be worthwhile inside 5 years in its base case state of affairs. This forecasted a 20% compounded annual progress fee in In-force premium and a 70% gross loss ratio. I personally consider these estimates to be very conservative and I consider Lemonade can surpass this. Base Case Profitability (Q3 earnings date)The firm has a stable steadiness sheet ~$225 million in money and whole debt of $36.6 million which is manageable. Advanced Valuation In order to worth Lemonade I’ve plugged its newest financials into my discounted money circulate valuation mannequin. I’ve forecasted a conservative 50% income progress for subsequent yr, which is roughly half of the prior yr’s progress fee. In addition, I’ve forecasted 55% income over the subsequent 2 to five years. I’m anticipating a slight dip in progress fee because the comparability metric will increase and we enter a recessionary setting. Lemonade inventory valuation (created by creator Ben at Motivation 2 Invest)I’m additionally forecasting the enterprise to extend its pretax working margin to 22% over the subsequent 8 years. This assumes the corporate would attain profitability in 5 years (As per the bottom case state of affairs). Then I forecast the enterprise will surpass this with a number of cross-sells throughout classes, larger scale and a decrease loss ratio. Lemonade inventory valuation 2 (created by creator Ben at Motivation 2 Invest)Given these components I get a good worth of $37.84 per share, the inventory is buying and selling at $20 per share and the time of writing and thus is ~47% undervalued. Lemonade can also be buying and selling at a ahead price-to-sales ratio = 5.6, which is cheaper than historic ranges of over 50, which is astonishing. As a comparability, Auto insurtech Root (ROOT) has a PS ratio = 0.324 and residential insurtech Hippo (HIPO) has a PS ratio = 2.6. Both of those shares commerce cheaper, however they’re single class targeted for probably the most half and are fighting profitability. Data by YChartsRisks Recession The excessive inflation and rising rate of interest setting has brought on many analysts to forecast a recession. When shoppers are having enter prices squeezed I think about fraudulent insurance coverage claims could enhance, as folks search for further methods to attempt to generate income. In addition, many progress shares have seen their valuation multiples compressed which suggests a better value of capital for firms. Other dangers embrace excessive climate circumstances reminiscent of Hurricanes and winter storms which have impacted lemonade’s loss ratio previously. Lemonade’s technique is to deal with extra of a “miles per gallon” technique and fewer on a “mile per hour” technique because it goals to protect money and deal with profitability. Final Thoughts Lemonade is an amazing firm that’s disrupting the incumbent insurance coverage trade. The firm is actually providing insurance coverage at a quicker velocity, a greater worth, and with a coronary heart due to its charitable giveback scheme which I have not mentioned on this put up. Management could be very expert, clear, and nice at speaking with buyers, which can also be one other optimistic. The inventory is undervalued intrinsically and relative to historic multiples and it thus could possibly be an excellent long-term funding.


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