Lemonade has fallen by about 30% over the
past few days
but if you're tempted to buy the dip, let
me explain why you shouldn't
Hey everyone my name is Ben, I'm a former
JP Morgan investment banking analyst and
welcome to rareliquid, the best channel
for tech investing
Lemonade recently reported its Q4
2020 earnings a few days ago so I'm
going to be going over a lot of that
and start off by talking about the good
things about the company and then I'll
talk about the bad things and what I'm
personally doing
But with that said, I'm not a financial
advisor so please treat all content as
for entertainment purposes only
Okay so let's start with the good stuff
from Lemonade's recent quarter
Lemonade's In Force Premium increased by
87%
from 2019 to 2020, driven by higher
premiums per customer
and an impressive 56% increase in number
of customers
If you're not familiar with insurance
just really quickly premiums are what
you pay as a customer per month
So for example, if I was getting rental
insurance from Lemonade at $10 a
month,
the premium is $10 a month. The
In Force Premium is annualized, meaning
that for our previous example where the
premium was $10 a month, since we
have 12 months in a year
the In Force Premium for that particular
contract let's say
is $120. Lemonade started off as a
disruptive renter's insurance company
but has since then launched new products
including homeowners,
pets, and life insurance and this is how
the company has been able to increase
the premium it charges per customer over
time
The company also grew their gross earned
premium to 50 million dollars,
which represents a 92% year-over-year
increase
Just as an FYI Gross Earned Premium
represents the amount of the enforced
premium Lemonade collects once the
service is fully delivered
If you were trying to convince someone
to invest in Lemonade
this chart right here would be the best
thing to show them. You see here an
increasing customer base,
higher premiums being charged per
customer, and thus a higher In Force
Premium
all at pretty impressive growth rates. In
addition to this,
management strongly hinted that it's
going to be working on a new product
that will launch later this year
and it's most likely going to be car
insurance. And you're absolutely right
we're not done and we did hint that
we've got a major launch coming in
effect we have more people
working on this yet to be announced
product than on any of those other
products that I just mentioned
So it's a source of great excitement
internally but i'm sorry wilfred
to disappoint you i'm not going to easy
announce it right keep
Keep smiling if it's auto insurance
[Laughter]
Does that count? There we go I think
we've got it
This could be a huge revenue driver for
the company
and I do like that Lemonade is expanding
pretty aggressively into new products
As long as the company can grow its
customer base pretty substantially over
time,
then I do think the company could have a
bright future ahead but in my view
that's pretty much where the good stuff
ends so next let's talk about why the
stock is down
The first thing i need to do is to set
the stage by showcasing Lemonade's
extremely
sky-high valuation the company was
trading at about
132 dollars per share which gave the
company a market cap of around 8.5
billion dollars adjusting for the
company's cash of 1.2 billion dollars
which incorporates the company's latest
follow-on offering
The company had an enterprise value of
about 7.2 billion
In the latest quarter the company guided
to a midpoint of 115.5 million dollars
in revenue
The company was trading at 63 times 2021
revenue,
which is higher than pretty much all of
the fastest growing software companies
in the world
But that's the thing really, in my view
Lemonade is not really
a software or pure tech company. It's
really an insurance company
The most obvious proof of this is in the
company's gross margins which jumped in
the latest quarter to 37%
before the full year of 2020 was at a
very subpar
26%. the reason that Lemonade will never
be a pure software company is because
as an insurance company, it needs to pay
customers who file successful claims
This expense is called loss and loss
adjustment expense
and that in addition to other insurance
expenses represents Lemonade's cost of
doing business or its COGS
Given that the company was trading at a
higher revenue multiple than pretty much
every single high growth software
company,
Lemonade really needed to crush earnings
in order to propel its stock forward
Quick shameless plug for my Patreon and
Discord i messaged out to my patrons a
few weeks ago that i thought Lemonade
was really overvalued
and bought put options, which have been
giving me some really good gains over
the past few weeks
My hope is that the info that the
community on discord and i provide
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month, so if you're interested
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Alright dude no one cares. Okay so anyway
with these sky-high expectations that
Lemonade had given its valuations,
unfortunately during the latest quarter
the company did not deliver
While customers have increased year over
year by 56 percent,
if you take a closer look at the quarter
by quarter data, you can see that
Lemonade added about 60,000
new customers, which is the smallest
increase over the past
two years. And it's not like the company
is spending any less in marketing, which
is pretty much
in line with previous quarters. This
slowdown in customer growth is something
I would worry a lot about
as a Lemonade investor because it's
really the biggest driver of the
company's growth
In addition to all of this about a
quarter of Lemonade's customers are in
texas which as you probably know was
recently hit with a huge power outage
In the latest earnings call management
stated that there will be a spike in its
gross
loss ratio but no material effects to
its financials,
which I personally find a little bit
hard to believe on a separate note some
may also point to the company's
improvement
in its operating expense margin when
compared to its Gross Earned Premium
and it's true that it's gone from
negative 156 percent to negative 89
percent,
but the 44.5 million dollars spent in
quarter four 2020
earned the company a total of just 7.5
million dollars
Now personally I am okay with companies
that are growing really quickly
and have healthy margins to be spending
a lot of cash and being unprofitable,
but for Lemonade with its slowing down
of customers and poor margins,
I really don't think the high valuation
can be justified so that's why I believe
Lemonade stock has been on the decline
Of course in addition to all of this is
the whole macro environment where bond
yields have been going up which really
punishes growth stocks
and so that's definitely a factor at
play here as well
Okay so now I'm going to provide a
pretty quick calculation of where
Lemonade should be trading at in my
opinion
If we take a look at some of the fastest
growing tech stocks in the world
of which all are growing quickly and
have true growth margins
in the 70s or above, then I think it's
safe to say that at max
Lemonade deserves to be trading at a 35
times next 12 month sales
multiple which i think is still generous
and multiplying these together gives us
an enterprise value of 4 billion dollars
after we add back 1.2 billion dollars in
cash we get an estimated market cap
of 5.3 billion dollars, which when you
divide by Lemonade's fully diluted
shares
comes out to a 82.68 share price which
represents a roughly 20
drop, but I think 35 times is still a
really generous multiple given that the
company's growth is in question
and has poor margins and I believe the
company should be trading truly closer
to
20 times which gives us a share price of
55.57
now do I think that the stock is going
to go down to $55?
I think maybe if bond yields keep going
up and we have a big tech correction I
think it's possible
but still probably not likely right now
any reversal in the bond yields will
likely drive the stock price back up
but I think over time the stock will go
back down
at least into the double digits around
80 or so I think is much more of a
fair price but still overvalued and so
that's why I'm personally staying away
from the stock unless
it somehow goes into the 50s or lower
Alright guys, that wraps up the video
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as always thank you so much for watching
and I'll catch you in the next video
Thanks, peace out
you