Why Lemonade Stock Is Dropping This Week

What happened

Lemonade (NYSE:LMND) released its second-quarter earnings report on Wednesday after the market closed. Revenue came in at $28.2 million, slightly ahead of Wall Street’s expectations. But the company posted a widening net loss of $55.6 million, or $0.90 per diluted share, which sent the stock tumbling after hours.

In fact, shares of Lemonade are now down 7.4% week to date as of 1 p.m. EDT on Friday.

So what

Despite Wall Street’s reaction, Lemonade’s latest earnings report shows promise. In-force premiums (IFP), the annualized sum of all customer premiums, accelerated for the second consecutive quarter, jumping 91% to $297 million, showing robust demand. And Lemonade’s customer count hit 1.2 million, up 48% from the prior year.

Investor holding head in grief as stock price plunges.

Image source: Getty Images

Moreover, Lemonade’s gross loss ratio (the percentage of premiums paid out in claims) came in at 74% in the second quarter, a dramatic improvement from the 121% spike caused by the Texas freeze in the first quarter. This figure is a few percentage points higher than the industry average, but Lemonade is still a young insurance company.

Meanwhile, many of today’s industry leaders have been operating for over a century, meaning they weren’t designed for modern data science or artificial intelligence. That gives Lemonade an advantage. Specifically, as the company adds news customers and collects more data, its ability to quantify risk should improve, and Lemonade’s loss ratio should continue trending downward.

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There’s one more metric I’d like to highlight. Gross profit surged 81% during the second quarter, hitting $9.8 million. Investors should look for that rapid growth to continue in the coming quarters.

Metric

Q2 2019 (TTM)

Q2 2021 (TTM)

CAGR

Gross profit

$5.7 million

$26.5 million

116%

Source: Lemonade SEC filings. TTM: trailing 12 months. CAGR: compound annual growth rate.

Now what

For what it’s worth, I am a Lemonade shareholder and I remain bullish on this company. It’s never fun to watch a stock drop 7% in one week, but those types of swings are unavoidable with unprofitable tech companies.

On the bright side, Lemonade’s digital-first, mobile-friendly approach to insurance appears to be gaining traction with consumers, and there’s reason to believe that trend will continue.

For instance, Lemonade plans to add car insurance to its portfolio in the near term. This will boost the company’s market opportunity by $300 billion, pushing the total to over $400 billion. More importantly, current Lemonade customers already spend $1 billion on auto policies (with other insurance companies), meaning this new product could help Lemonade unlock value in its existing business.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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View more information: https://www.fool.com/investing/2021/08/06/why-lemonade-stock-dropped-after-q2-earnings/

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