Lemonade (LMND -10.78%) is a $1.5 billion insurance technology company. It operates in five markets: renters' insurance, homeowners' insurance, life insurance, pet insurance, and car insurance -- and it's on a mission to disrupt the industry by using artificial intelligence (AI) across its entire organization.
Lemonade's AI chatbots can autonomously write quotes for customers in under 90 seconds and pay claims in just three minutes without human intervention, eliminating many of the lengthy phone calls and delayed payouts that are common with other insurers. Plus, the company uses AI to calculate premiums to ensure the most accurate price possible for customers.
Lemonade's business achieved an important profitability milestone during the second quarter, and here's why it's a good reason to buy the stock this month with the intention of holding for the long term.
Image source: Getty Images.
Making progress across most key metrics
Lemonade had over 2.1 million customers at the end of Q2, which was a 14% increase from the year-ago period. The company is finding success among younger-age cohorts which have historically been underinsured, thanks to its tech-based approach and its "Giveback" program which donates a portion of premiums to charity.
Lemonade's average premium per customer also rose 8% to a record high of $387 as the company continued to benefit from more customers buying multiple policies. That drove its in-force premium -- which is the value of all premiums from active policies -- to $838.8 million, which was also a record.
But there's an even bigger story internally. As I mentioned earlier, Lemonade uses AI to price premiums, but its models also help identify underperforming products and markets so management can make rapid operational decisions to save money and drive more revenue. The AI-powered automation of those business processes has reduced the company's reliance on human employees and is having a very positive impact on its financial results.
Over the past year, Lemonade reduced its headcount (number of employees) by 9% while growing its insurance book by 22% at the very same time. In fact, the company's in-force premium per employee reached an all-time high of $693 during Q2, more than doubling since the end of 2021 when it was at $340.
Lemonade's objective is to use this operating leverage to reach profitability. It has routinely lost money each year since it was founded because scaling insurance businesses can take a significant amount of time and money. While the company isn't quite there yet, it's making noteworthy progress.
A key profitability milestone
Lemonade has around $931 million in cash and equivalents on its balance sheet, and it previously told investors it could become cash-flow positive without requiring any further capital. The company generated a net loss of $57.2 million during Q2 on revenue of $89.3 million, but it delivered positive net cash flow of $4 million for the first time ever.
Net loss is a generally accepted accounting principles (GAAP) metric. Net cash flow, on the other hand, is a non-GAAP metric which simply measures the net change in Lemonade's cash position; it ignores non-cash expenses like stock-based compensation, which are required to be included in GAAP figures.
To be clear, GAAP profit is typically considered "true" profit, whereas companies can get creative with their adjustments to reach a non-GAAP profit. However, it's definitely a positive that Lemonade is now generating positive cash flow. It reduces the probability of a capital raise in the future, which would dilute existing shareholders, or debt financing, which isn't ideal, with interest rates at elevated levels.
Why Lemonade stock is a buy now
Lemonade's business is still young, and its financial results will be lumpy going forward as it continues to scale. But its gross-loss ratio adds further fuel to the idea that the company is making excellent progress. It measures the percentage of premiums that are paid out as claims, and it came in at 79% during Q2, which was down from 91% a year ago. Management thinks 75% is the sweet spot for a thriving insurance business over the long term, and it's nearly there.
Despite all of the positives I've highlighted, Lemonade stock is still down 89% from its all-time high, which was set during the tech frenzy in 2021. It was unquestionably overvalued back then with a price-to-sales (P/S) ratio of over 100, but it has now come down to just 2.6, which is near the cheapest level since Lemonade came public in 2020:
LMND PS Ratio data by YCharts.
Despite all of the hype surrounding AI, Lemonade is one of only a few companies successfully monetizing the technology. With a market capitalization of just $1.5 billion and plenty of positive momentum in its business, this could be a great stock to buy right now.
