This recent IPO is on a mission to disrupt a traditional industry that is centuries old. But is this socially conscious and innovative company a good buy?
Lemonade (NYSE: LMND) operates in the insurance industry, which has historically been highly profitable but has garnered the dislike and distrust of the consumer. Lemonade aims to change this by offering contents and liability insurance that is customer-centric and “built for the 21st century”. It currently operates in a few U.S states, Germany, and the Netherlands with plans to expand to all U.S states and 31 countries in Europe.
The bull case for Lemonade:
Today, the insurance industry represents approximately 11% of GDP in the U.S. and $5 trillion worldwide. Just over one-tenth of the Fortune 100 is made up of insurance companies with an average age of 125 years old, which demonstrates the lack of disruption through the years. Despite the size of these stalwarts, none of these has managed to maintain a share of greater than 4%. There is a massive opportunity for growth for Lemonade if it can capture a small portion of this highly profitable industry.
Lemonade recently reported its inaugural quarterly report and posted some impressive results. Fiscal Q2 revenue for 2020 came in at $29.9 million, an increase of 117% year-over-year. This was driven by 84% growth in customers to 814,160 year-over-year with the majority under the age of 35. Net loss for the quarter also decreased by 9% from the year previously to $21 million, and the company had $295 million in cash and cash equivalents.
Lemonade braced for the impact of COVID-19 expecting to see a jump in churn along, a drop in demand and a hit to cash flow, however, “None materialized”. Despite the impact of COVID-19, less than 1% of customers deferred their payments, which demonstrates the strength of its business model in uncertain times.
Lemonade’s business model differs from other insurers by keeping a flat 25% of the premium and while the remainder is used to pay claims and give what is left to charitable causes. The use of A.I and machine learning should help to lower costs, and the unit economics should improve with scale as it expands. Lemonade’s loss ratio has also continued to decline in the last few years, from 89% in Q2 2019 to 67% today.
The bear case for Lemonade:
While there is a considerable opportunity for Lemonade, it is a relatively high-risk investment, and this task of disrupting the insurance industry is a confessed David versus Goliath scenario. The company acknowledges this and the fact that there will be some challenging times ahead.
Large insurance companies such as Berkshire Hathaway and Allstate present stiff competition. These companies may choose to integrate A.I or introduce a mobile app to compete with Lemonade if this model continues to gain traction. However, Lemonade’s overall user experience may combat this despite the deep pockets of larger players.
The concentration of the majority of Lemonade’s client base is also a risk factor with over two-thirds of gross written premiums coming from three states according to its S-1 filing. A natural disaster in one of these states could prove to be extremely costly for Lemonade.
So, should I buy Lemonade stock?
This company is in the early stages and therefore carries with it more significant risk. However, the company’s first quarterly report and shareholder letter were incredibly impressive. This is a socially conscious company on a mission to disrupt and change the perception of the insurance industry. There is a lot to like about Lemonade, and it could prove to be a big winner in the coming years.
When did Lemonade go public?
Lemonade went public on July 2nd, 2020.
When was Lemonade founded?
It was founded in 2015.
Who is the CEO of Lemonde?
Daniel Schreiber is the co-founder and CEO.
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