Did You See These Earnings??

Dave R

Posted November 4, 2023

A couple of our stocks, from the Pro Trader Today portfolio, had a pretty good day yesterday…

AI drug development company Schrodinger (NASDAQ: SDGR) ramped 20% after reporting third quarter earnings. That’s a huge move for sure, but nothing compared to the 40% moonshot that Lemonade (NASDAQ: LMND) made.

Now, both stocks have been hit hard over the last couple of months. And even with yesterday’s gains, they’ve only managed to recover to price levels at which I first recommended them. Still, it’s a good time to review each of them. 

I’ll start with Lemonade. Lemonade gets called a “disruptive” insurance provider because the policy process is automated and premiums are assigned by its AI algorithm. 

Lemonade is an upstart company, it went public in June of 2020. It was a pretty hot IPO too, opening at $50 and closing its first day of trading at $69 a share. You probably know how it goes with IPOs – they have a tendency to struggle for a while after the hype wears off and the company confronts the difficulty of becoming profitable as a public company.

In Lemonade’s case, it was a pandemic darling – running as high as $188 in early 2021. I’ve had my eye on it for some time, and finally pulled the trigger on it in May of this year at $15 a share. Here’s the original recommendation if you want to see it… 

Now, any up and coming company goes through its struggles. Lemonade has been no exception, as you might guess from the stock’s price movement from $50 to $188 to $15. Even after I recommended the stock at $15 in May, the stock ran to nearly $25 in late July and then a sell-off that really got started in August crushed the stock down below $11. 

Because Lemonade is trying to validate a unique business model, investors have been especially jumpy. Sentiment swings from “Oh WOW!” to “Oh SHIT!” pretty much on a quarterly basis as.

Like when I finally felt comfortable enough to recommend it, Lemonade had just come off an “Oh WOW! first quarter that saw the stock jump  from $11 to $14 overnight. . 

Then second quarter earnings from July, it was right back to “Oh SHIT!,” largely because of extreme weather events. Like most insurers, Lemonade had to pay out more than expected for weather-related claims and some investors questioned whether the business model was viable…

Yes, 2Q 2023 revenue more than doubled from 2022. But its loss ratio (the amount of premium it has to pay back out to settle claims) was 94%. Lemonade’s model needs its loss ratio to be closer to 70% to be profitable. So, yeah, Oh SHIT!

Now I realize that this next part might’ve been more useful to you on Wednesday…  

Lemonade’s third quarter earnings just swung back to Oh WOW!

First, Lemonade’s loss ratio fell back to 83%. There’s still a ways to go to get to the goal of a 70% loss ratio, but at least it’s headed in the right direction. 

Also, revenue increased 55% from last year to $115 million, gross profit was up 170%, operating costs fell 11% and the company said it should be cashflow positive in 2025. With nearly $1 billion in cash, Lemonade should have no problem getting to profitability without having to raise money and dilute shareholder value. 

So Lemonade rallied 40% yesterday, and is up another ~10% to $18 as I wrote today. 

Again, I realize all this information might’ve been more useful on Wednesday. I also realize it’s not easy to buy a stock after it’s launched like Lemonade has. But remember: even with that ramp job, the company is valued at just $1.25 billion (which is 3X trailing revenue), it has $945 million in cash and cash equivalents and has a clear path to profitability.  

Now, continuing with today’s theme of “things that should’ve been brought to your attention on Wednesday”, let’s take at the other Pro Trader Today recommended stocks that broke out yesterday, Schrodinger (NASDAQ: SDGR)…

So, maybe throwing out a Cartman meme to play off the “Schrodinger’s Cat” thing is a reach, and truth be told, I’ve never really been able to understand the Schrodinger’s Cat conundrum anyway, but I’ve always thought that Cartman yelling at his cat was funny, and there’s no doubt Schrodinger was a bad kitty over the last couple months…

I recommended Schrodinger to Pro Trader Today readers back on April 3, just as AI stocks were breaking out. You can read the original recommendation here, if you like.  

Schrodinger has built a platform that uses AI to speed up drug discovery. Put simply, the Schrodinger platform makes it possible to model completely new compounds and test their efficacy. Schrodinger uses the platform for its internal drug development, with partners, and it also licenses its platform to pretty much every pharmaceutical and biotech company in the world. 

What I wrote in April hasn’t changed: All 20 of the largest pharmaceutical companies in the world use Schrodinger’s software platform. And Schrodinger also has 1,750 biotech companies as customers. “Ubiquitous” might be too strong a word to describe Schrodinger’s technology, but it is widely used. 

Schrodinger makes money by developing compounds and then selling them, licensing them or partnering with a larger firm for further development. I first recommended the stock after it received a $105 million payout from partner Takeda Pharma. 

It is these milestone payments or outright sales that are the gravy for Schrodinger. Software licensing is the company’s bread and butter. 

From yesterday’s earnings conference call: For the first three quarters of the year, our Software revenue was $90.5 million compared to $88 million for the same period last year, and our Drug Discovery revenue was $52 million compared to $36 million for the same period a year ago…We continue to expect full year Software revenue growth to be 15% to 18% and expect drug discovery revenue to be in the $50 million to $70 million range. 

In other words, Schrodinger may get a slight bump in drug discovery revenue between now and end of year. The real growth is coming from increased software revenue. Given that Schrodinger already has a virtually ubiquitous position with potential customers, software revenue growth is achieved by existing customers expanding their use of the platform. Management’s confidence in that 15% – 18% revenue growth for software tells us that the majority of that growth is coming in the current quarter. 

Now, I first recommended Schrodinger at $26.50. The stock ran as high as $59, before selling off to ~$20 since early August. In the last two days, it has added $8 – from $20 to $28. I wouldn’t be too surprised to see a little pullback, but at the same time, the stock is still right about where I first recommended it, so I’m not uncomfortable with it at current prices. 

Ok, that’s it for me this week, take care, have a great weekend and I’ll talk to you on Monday…

Briton Ryle

Chief Investment Strategist
Pro Trader Today
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