Lemonade (LMND 0.80%) stock has been disappointing investors for years now, although it's been up and down over that time. It actually made some incredible progress last year, both in its business and its stock price, but it's lost some of those gains and is 81% off of its highs from 2021. Is it finally time to buy Lemonade stock?
Turning lemons into Lemonade
Lemonade is an insurance technology company that's challenging legacy insurers. It's a David in a sea of Goliaths, and customers are signing up for its digital, easy-to-use products at a rapid pace.
2024 was a banner year for the company, as it achieved strong growth while lowering its loss ratio, or how much of a policy it pays out in claims, and generated positive free cash flow on an annual basis for the first time. In-force premium (IFP), or average total premiums, increased 26% year over year in the fourth quarter. That's a combination of premium per customer, which increased 5%, and customer count, which increased 20% to more than 2.4 million. Adjusted free cash flow was $27 million, up from an $11 million loss the prior year.
NYSE: LMND
Key Data Points
Lemonade is coming through on its growth strategy, although the profitability part is taking longer than investors are liking. Lemonade's plan has been to catch younger customers and grow with them as their insurance needs expand. It started out with renters insurance, which appeals to a younger group, and it has since launched homeowners insurance, pet insurance, car insurance, and life insurance. As customers engage with and enjoy Lemonade's platform, they're adding more expensive products.
Management touts that it was built with a digital infrastructure using artificial intelligence and machine learning from the very beginning, and all of its parts are interconnected. This is a model that legacy insurers are having a hard time duplicating. Even though everyone is using AI today, older insurance companies have disparate segments that don't "talk" to each other, leaving them at a distinct disadvantage in this day and age. Although Lemonade is still a small disruptor, investors shouldn't underestimate where it could end up, considering how well the model is working right now.
Investors appreciated the performance, and Lemonade stock ended the year up 128%.
Investors are still sour
The loss ratio has been the major sticking point for investors, because it's been underwhelming, and it means that Lemonade is paying out too much money to be profitable. Management has maintained throughout that its models are effective and improving, and that as a young company, it's going to take time to get them right. After all, the algorithms are most useful as they get more data, and without the expense and time to provide that data, there's going to be a learning curve.
It continues to refine its algorithm and launch new models, and there was major progress last year. In the fourth quarter, the loss ratio was 63%, its best ever. The trailing-12-month loss ratio was 73%, a 12 percentage point improvement year over year.
However, Lemonade is still reporting high net losses as it rolls out with high marketing expenses. Net loss was $30 million in the fourth quarter, although that was up from $42 million the year before. There's also still risk until the loss ratio remains low over time, and Lemonade proves that it can keep it down.
Getting sweeter
Management still maintains that it's going to be highly profitable and do a better job than traditional insurance companies, but it may take some more time to get to that point before it flies. IFP growth has been accelerating, and Lemonade is expecting it to surpass 30% in 2026. It's keeping its operational costs down, and as those work together, it's leading to higher profits.
The company is expecting its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to be positive next year too, and for gross profit to keep expanding. It sees a net profit following in 2027, and it has longer-term ambitions of turning its current trailing-12-month IFP of nearly $1 billion into $10 billion. If the stock follows that, shareholders should benefit from a windfall.
So is now the time to buy? If you have an appetite for risk and the time to wait for this to happen, now could be a good time to take a position in Lemonade stock.
