Lemonade Is Down 75%; Is This Disruptive Growth Stock Undervalued?

Lemonade's (NYSE:LMND) stock was once a high-flying one; the insurance technology ("insurtech") company had a meteoric IPO in 2020. The stock was trading more than 350% above its floor price at one poing, and this was higher than any other stock above a $300 million market cap, according to data compiled by Bloomberg.

For a while, the charismatic and well-spoken founder Daniel Schreiber could be seen all over CNBC and Bloomberg as well as various investing podcasts and even Youtube Channels. He highlighted the major problem with incumbent insurance companies: they dont care about the customer and hate paying out premiums. The solution, he claimed, was Lemonade, a user-friendly insurtech company which speaks to the millennial customer.

Using artificial intelligence (AI), the firm offered the ability to buy insurance in 90 seconds, with no long forms to fill out. But thats not all - the firm also touted massive cost savings vs. competitors of up to 80%, which would allow it to pay out more claims and keep customers rolling in. Lemonade's AI claim bot, AI Jim, even broke a world record for the fastest claim paid out to a customer in just 3 seconds!

Why is the stock down?

With such an exceptional product and all the positive fanfare surrounding the IPO, you may be wondering why the stock is down by over 75% from its highs in July 2021. The first major reason is that a lot of the stock's meteoric rise was due to a roaring tech bull market thanks to record easy-money policies in 2020 and 2021. Now, the resulting high inflation from easy-money policies is set to require a rise in interest rates in order to avoid hyperinflation, resulting in a compression in multiples for all growth stocks.

Lemonade has also seen user growth start to slow as some customers, particularly older generations, are not too keen on interacting exculsively with the AI for insurance. Investors have cooled on the stock somewhat following the Texas freeze of 2021 as well due to the number of claims that were granted in the devastating climate anomaly.

Lemonade Is Down 75%; Is This Disruptive Growth Stock Undervalued?
Lemonade Is Down 75%; Is This Disruptive Growth Stock Undervalued?

Financials are still growing

Lemonades revenue growth remains strong. In the fourth quarter of 2021, they reported in-force premium (IFP) of $380 million, which was up 10% quarter-over-quarter and a massive 78% year-over-year. The company has also seen continued growth in customers and is growing their average premium per customer.

Lemonade Is Down 75%; Is This Disruptive Growth Stock Undervalued?
Lemonade Is Down 75%; Is This Disruptive Growth Stock Undervalued?

In the fourth quarter, the firm added 63,000 customers, which was up 5% in the quarter and 43% year-over-year. Lemonade now has a massive 1.43 million total customers.

However, the firm reported a heavy net loss of $70 million in the recent quarter, which has more than double the net loss of $34 million in the same quarter of 2020. For full-year 2021, Lemonade reported a net loss of $241 million, which was up 98% from $122 million in 2020. This is immense. The firm is also paying out a heap of stock-based compensation to executives, which they expect to eat up 39% of revenue in 2022, up 6% year-over-year.

The good news is, this situation of expanding net losses is expected to peak in 2022, according to the CEO.

Is the stock undervalued?

Lemonade is trading at its lowest price-sales ratio in history with a price-sales ratio of 13. The company also trades at a forward enterprise-value-to-sales ratio of just 4.4 after reaching a crazy forward enterprise-value-to-sales ratio of 100 in January of 2021. Relative to insurance incumbents which trade at forward enterprise-value-to-sales ratios of typically 1 to 2.5, this is fairly cheap given the expected growth rate for Lemonade, which is 55%+ vs. the 5% to 20% expected for incumbents.

Final thoughts

Lemonade is a fantastic company which has the potential to disrupt the entire insurance market. The global insurtech market was valued at $3.85 billion in 2021 and is expected to grow at a compound annual growth rate (CAGR) of 51.7% from 2022 to 2030 , according to Grand View Research. This means there is a massive total addressable market for Lemonade to tackle.

However, the company does still have a long way to go, and both inflation and increasing net losses will likely continue depressing valuation multiples for some time to come. For those willing to hold long-term, I think the bet could pay off, but expect a bumpy ride.

This article first appeared on GuruFocus.