Lemonade Stock: Expensive Even If Path To Profitability Materializes (NYSE:LMND)

Money falling in a manhole

LdF/E+ via Getty Images

When we last covered Lemonade, Inc. (NYSE:LMND), we were worried about the losses and their impact on the company’s financial future. Specifically, we said:

Finally, apparently nobody has bothered to figure out how LMND gets to the end of 2025 with a negative book value per share. We can assure you that no regulator is going to allow them to write $800 million of policies with zero dollars in the bank. But even if we believe these optimistic numbers, that is where LMND will be at the end of 2024.

Source: When Will The Juice Run Dry?

Our “Hold” rating was mocked by the market and the stock has now danced up over 38% (as we see it pre-market at $27.80) from our article. Were the results really that good?

Q2-2022

Some of the madness we have seen off the June bottom has been a tale told in three words – better than expected. It is almost as if the absolute numbers or even the longer-term trajectory of earnings does not matter. All that matters is what a bunch of analysts, whose only job is usually to make the company look good, predicted. LMND’s beat, while in the same vein, was definitely a bit more impressive. The GAAP loss was a $1.10 and came in 22 cents better than expected.

-

Q2-2022 Shareholder Letter

Some might attribute this to Metromile (MILE) closing, but that closed on July 28 and had nothing to do with the Q2-2022 results. So where was the beat? LMND’s revenues increased on point as expected, and its loss and loss adjustments actually climbed faster than revenues. So policy related losses did not improve here. What did improve and rather markedly, was the sales and marketing expense. That was up about 13% and clearly was an outlier in the expense group. We, and others, have remarked on the high costs of policy acquisition and this was a good result, especially in light of wage inflation we have seen. LMND’s cost controls were great in this area and that was reflected in the bottom line number.

Guidance

LMND also hit the bears hard with guidance.

Our EBITDA for 2022 will be materially better than previous guidance. We guided to ($280m – $265m) on a standalone basis, and are now guiding to ($245m – $240m) on a consolidated basis. (As a point of reference, Metromile’s EBITDA was approximately ($45m) for H1 22.)

Source: Q2-2022 Shareholder Letter

This is definitely the kind of turnaround the bulls were hoping for and LMND capped it off with the following statements.

Our last major capital raise was in January 2021, and in the intervening months we’ve seen our cost of capital increase by about one order of magnitude – a direct corollary of what has happened to ‘growth stocks’ during this period. Fortunately, we were well capitalized entering the downturn, so this heightened cost of capital has not had a first-order impact on our business.

…We plan to manage our capital to achieve profitability without requiring a further infusion of capital.

Source: Q2-2022 Shareholder Letter

Can this be done?

We heard what the company is saying, and we believe they believe it, we on the other hand don’t think that is feasible. The income statement below shows that losses currently exceed revenues.

-

Q2-2022 Shareholder Letter

If on a quarterly basis, you held all expenses constant, except loss and loss adjustment expense (which would rise with revenues) you would need to quadruple revenues before you showed a profit.

-

Author’s Estimates & Calculations

That would imply an $800 million run rate (excluding Metromile), which happens in 2026 according to one brave soul.

-

Seeking Alpha

Currently, LMND has $850 million in tangible equity.

-

Q2-2022 Shareholder Letter

After accounting for Metromile’s cash on balance sheet ($155 million) and projected losses, we should be back at about the same point by year-end. Assuming an extremely optimistic path forward where losses glide down to $200 million in 2023 and then drop $66 million each year, we might get to $450 million in tangible equity before profitability. That is extremely optimistic and as we have said above, it assumes every expense other than loss and loss adjustment category stays flat while revenues quadruple.

Verdict

That capital raise will come, in our opinion, and it is actually advantageous for LMND to do it when its stock is trading at a nice multiple of tangible book value. We can see that among peers, only Allstate (ALL) is trading at a higher price to tangible book and there is a huge difference in profitability between ALL and LMND.

-

Y-Charts

While the path to profitability may be defined by the company today, we think it will be incredibly challenging. We say this as even giving credit to them for amazing economies of scale (we are holding all relevant costs constant) and no major losses, it appears difficult in the next two years. The company now sports a $2.0 billion plus market capitalization (adjusted for pre-market move and the Metromile integration) and that is about 4X where we have tangible equity before we have a chance of profits. We are moving this to a Sell rating. If LMND can execute a large capital raise at any premium to tangible book, we would actually become less bearish.

Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints.

Be the first to comment

Leave a Reply

Your email address will not be published.


*