Lemonade Stock Hits 52-Week High: Is This the Turning Point?
After a stellar third-quarter earnings report, Lemonade (NYSE: LMND) stock has reached a 52-week high. But will this upward trend stick? Historically, the insurance technology company’s post-earnings surges have been followed by a decline back to previous levels. This time, however, the company’s impressive results suggest a potential shift in its trajectory.
Measuring Success Differently
As an insurance company, Lemonade’s growth and success are evaluated using unique metrics. While revenue and profits remain important, the company’s primary top-line metric is in-force premiums (IFP), which represents the average of current policies in place during the quarter. This metric provides a more accurate picture of the company’s performance, as it reflects the policies paid for by customers, even if not all of it becomes revenue.
Impressive Q3 Results
Lemonade’s Q3 results were remarkable, with IFP increasing 24% year over year, an acceleration from previous quarters. Revenue grew 19%, and total customers rose 17% to 2.3 million. The company’s strategy of attracting younger customers and growing with them is paying off, as premium per customer increased 6%. Notably, headcount decreased 7% while IFP grew, indicating the benefits of digital systems.
Path to Profitability
Although Lemonade has not yet achieved profitability, management is confident that with scale and time, the advantages of digital systems will lead to profitability. The company’s operating cash flow was positive $16 million, and net cash flow was $48 million. While marketing expenses are expected to increase next quarter, the company’s loss ratio, a key indicator of long-term viability, is trending downward.
Loss Ratio Improvement
The loss ratio, which measures the percentage of policies paid out in claims, decreased to 73%, a 10-point improvement year over year. This marks the fifth consecutive quarter of sequential improvement in the 12-month trailing number. Management’s efforts to adjust policy makeup and reduce exposure to catastrophes are contributing to this improvement.
Valuing Lemonade Stock
With an unprofitable stock, traditional valuation metrics like price-to-earnings or price-to-cash-flow ratios don’t apply. However, Lemonade’s price-to-sales ratio of 3.4 is reasonable for a fast-growing stock, especially considering its three-year average of 6.4.
A Long-Term Investment Opportunity
While Lemonade stock may not skyrocket overnight, its potential for long-term growth makes it an attractive investment opportunity. As the company continues to improve its loss ratio and achieve profitability, its stock is likely to reflect this progress. If you’re willing to ride out potential volatility and have a long-term horizon, now might be a good time to invest in Lemonade.
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