Lemonade Stock Down 22% Today – Time to Buy LMND Stock?

The price of Lemonade stock is diving nearly 22% this morning in pre-market stock trading action following the release of the firm’s financial results covering the fourth quarter of the 2021 fiscal year as the online insurer posted above-expected net losses for the period.

For the three months ended on 31 December, Lemonade reported sales of $41 million resulting in a 100% jump compared to the same period a year ago while they also exceeded analysts’ consensus estimate of $39.4 million for the quarter.

The number of customers served by the company grew 43% on a year-on-year basis at 1.43 million while premium per customer increased 25% compared to the previous year as well at $266.

Meanwhile, gross profit for the quarter stood at $7.8 million. However, the company reported a higher net loss ratio of 96% compared to 73% the previous year. The management claimed that “a handful of older large losses” for which the company under-reserved were primarily responsible for the uptick in this key performance metric.

Moreover, the company added that it expects to report even higher loss ratios in the next few quarters as it is introducing new products whose economics are still relatively weak.

By the end of the quarter, the company produced net losses of $70.3 million – more than twice the amount it lost during Q4 2020 – while its negative adjusted EBITDA ended at $51.2 million compared to minus $29.7 million reported a year ago. On a per-share basis, net losses ended at $1.14 – roughly twice the losses analysts’ had forecasted for the period.

For the entire 2022 fiscal year, the company expects to report revenues ranging between $202 and $205 million. The upper bound of that estimate fell short of Wall Street’s forecasts by 14 million. The management said it expects to report “peak losses” in 2022.

Market participants are reacting negatively to the report as indicated by this morning’s sharp pre-market drop. The combination of higher-than-expected losses and gloomy forecasts for this year appear to be the reason why Lemonade stock is dropping today.

What could be expected from this insurance tech stock? In this article, I’ll be assessing the price action and fundamentals of Lemonade stock to outline plausible scenarios for the future.

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Lemonade Stock – Technical Analysis

The price of Lemonade stock has declined 45.5% since the year started and currently trades 83.2% below its 52-week high. This emphasizes the strength of the negative momentum that the stock is experiencing amid a confluence of negative catalysts.

First, macroeconomic conditions have deteriorated in the United States with inflation currently surging to its highest level in decades. This has led to a jump in US Treasury yields and that results in a higher risk premium applied to assets such as equities.

For companies such as Lemonade whose fundamentals are weak, risk premiums are even higher as investors fear that the business model might not be feasible or that the company may fail to secure the required financing to achieve its mid-term goals.

This is the second consecutive quarter in which the company’s losses have accelerated beyond the market’s expectations and that might indicate weakness in the business model as well.

The price has kept diving since the $45 horizontal support was broken back in December last year although the stock has been on an obvious downtrend way before that.

Momentum indicators remain heavily depressed with the Relative Strength Index (RSI) standing at 32 and below 50. Meanwhile, the MACD is sitting on negative territory and it appears to have flat-lined in the past few weeks.

Moving forward, the trend line support remains the line in the sand for LMND stock. A break below this technical marker may indicate that the downtrend is accelerating and that could lead to fresh all-time lows for this insuretech company.

Lemonade Stock – Fundamental Analysis

Even though Lemonade revenues have been steadily increasing in the past few months, some key performance indicators are showing weakness in the business model including an elevated loss ratio.

The company still needs to prove the feasibility of its approach to insurance, which leverages on technology to offer lower premiums by reducing operating expenditures.

Net losses continue to be climbing and that remains a concerning factor for a financial company. Last year, Lemonade produced negative free cash flows of $155 million. Meanwhile, the company’s cash reserves stood at $270.6 million.

Even though the company’s solvency is not necessarily in question as Lemonade holds another $801.8 million in fixed maturities and short-term investments, this cash burn remains concerning, especially if macro conditions deteriorate.

At its current market capitalization of $1.42 billion, the firm is being valued at around 7 times its forecasted revenues for 2022 and 3.5 times its gross earned premiums.

What could happen down the road if the business model turns out to be unfeasible is that Lemonade could be acquired by a stronger insurance company. In any case, considering the weak fundamentals displayed by the firm at the moment, these multiples still seem stretched and that could create room for further negative volatility in the next few months – especially if the overall sentiment of the market remains negative.

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