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John Engle
John Engle
Articles (529) 

Lemonade: A Sweet IPO, but a Sour Outlook

Aggressive marketing has driven Lemonade's rapid growth, but its profit potential remains uncertain

July 07, 2020 | About:

On July 2, Lemonade Inc. (LMND) debuted on the New York Stock Exchange to great fanfare. The upstart online insurance provider’s stated mission is to “harness technology and social impact to be the world's most loved insurance company.”

Whether Lemonade can succeed in its grandiose aims remains to be seen, but investors appear to be giving it the benefit of the doubt so far.

Bland IPO planning breeds sweet success

Faced with a market environment roiled by unprecedented levels of economic and social uncertainty, Lemonade initially planned for an understated IPO. On June 25, the company filed its S-1 with a price range for its shares of $23 to $26. Even after raising its IPO share price to $29, Lemonade’s valuation was still 23% short of its most recent private funding round last year, which valued the insurtech firm at $2.1 billion.

Ultimately, Lemonade need not have worried. The IPO was oversubscribed, raising a whopping $319 million at a $1.6 billion valuation. Shares opened at $50.06 and never looked back, soaring 132% in its first day. Even then, the market’s sweet tooth was not sated. On July 6, shares closed up another 17%. At $81.19 per share, Lemonade now boasts a market capitalization of $3.57 billion.

Saccharine expectations feed market sugar-rush

Lemonade has grown at a breakneck pace since its 2016 launch. Insurance premium volume grew from a measly $9 million in 2017 to $116 million in 2019. First-quarter revenue this year reached $26.2 million, a 141% jump from the same period last year. Its 729,000 active policyholders represent in-force premiums worth $133 million.

With 729,000 active policyholders at the end of March, Lemonade has clearly won over a significant number of consumers already. Moreover, its streamlined, tech-enabled service has earned it an enviable level of customer satisfaction. According to the S-1, Lemonade’s Net Performance Score, a measure of customers’ willingness to recommend a service, exceeds those of its traditional insurance industry peers.

Sour realities present bitter outlook

Lemonade’s massive growth has been fueled by aggressive spending. Overall operating expenses hit $119.8 million in 2019, with much of that cost stemming from advertising. Over the past two years, the company has spent a staggering $131 million on sales and marketing. Though Lemonade claims its marketing efficiency has improved significantly, stating in its S-1 that it now “spends $1 in marketing to generate more than $2 of in-force premium,” its advertising spend still absorbed 73% of total revenue in the first quarter of 2020.

Lemonade has demonstrated powerful top-line growth, but it has yet to prove whether this can translate to the bottom line. The company posted a net loss of $108.5 million in 2019, and 2020 is poised to see further losses, in my opinion. In the first quarter alone, Lemonade reported a net loss of $36.5 million. Thus, even as its annualized revenue run-rate has reached a new high, Lemonade still seems on track for an annual loss.

My verdict

Lemonade’s top-line growth has certainly been impressive. However, like so many tech disruptors seeking to encroach on long-established industries, it has continued to find profitability elusive. Investors evidently hope that, given sufficient scale, Lemonade’s superior product will win it a significant chunk of the insurance market. Unfortunately, profitable growth in a commodity-priced industry is often an expensive challenge.

Overwhelming market enthusiasm is a dangerous thing to bet against, but it is also just as risky to buy into a name that is being buoyed by expectations that are, at best, aspirational. My recommendation to investors is to leave this name alone.

Disclosure: No positions.

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About the author:

John Engle
John Engle is president of Almington Capital Merchant Bankers and chief investment officer of the Cannabis Capital Group. John specializes in value and special situation strategies. He holds a bachelor's degree in economics from Trinity College Dublin, a diploma in finance from the London School of Economics and an MBA from the University of Oxford.

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