The Case for Lemonade (NASDAQ: LMND)

Brit Ryle

Posted May 12, 2023

Mr. Heller was the neighborhood insurance guy. 

He didn’t play tennis. Mr. Heller was one of the dad’s that came to the local pool once a year – probably on July 4th – for what they called “the $1,000 swim.” That is, the one annual dip in the water for which he paid the $1,000 membership fee for his family. 

I have no idea how much insurance business my father sent Mr. Heller’s way. But the man always said hello to my brother and I when he was at the house for a party. And I got a birthday card from him every single year until I was probably 16. 

I had already moved from Richmond to Baltimore and I had no idea Mr. Heller had retired to DelRay Beach, Florida. But there he was in 2003 or so, having dinner with the missus at the same bar/restaurant that was hosting an after-conference happy hour that I was attending. I hadn’t seen him in probably 20 years, but he remembered me and we chatted for a couple minutes. I half-jokingly thanked him for all those birthday cards. 

Most neighborhoods probably had their “insurance guy.” I doubt there was much difference in policies – what mattered was the personality of the salesperson. As a fixture of the neighborhood, I expect Mr. Heller had plenty of life-long customers. And I’m sure he had reasonable expectations that he could bring on the neighborhood kids as customers one day, too…hence the birthday cards. 

Because that’s how insurance was marketed back then. It’s not really that different now – most people’s insurance choices still probably depend on personality, only now it’s whether they like Flo, the Gecko or the All-State guy better. 

I Got a Fever…

I got curious back in 2008-2009. The Great Financial Crisis (GFC) was steamrolling every aspect of the economy. Advertising was especially hard hit. Newspapers failed, magazines got really thin… but TV was still awash in GEICO ads. GEICO’s “Caveman” was voted America’s favorite advertising icon in 2008…

The media blitz drove GEICO’s policyholder numbers from 7 million in 2007 to over 9 million in 2009. Today, GEICO has over 17 million policies in force. 

If you didn’t know, GEICO is a wholly owned subsidiary of Berkshire Hathaway. Warren Buffett completed his buyout of GEICO in 1995.

I’ve looked for the quote several times and haven’t been able to find it. It’s Warren Buffett saying something along the lines of “the cost of capital from the insurance business is as close to zero as it’s possible to get.”

Because a big part of any insurance business is that it has the ability to invest the money it takes in from selling insurance premiums. Of course the insurance company has to be able to meet the liability from claims against the policies it sells. But there’s a lot of wiggle room there as to when – and if – the company has to pay out.

Consider the first insurance company Buffett bought: National Indemnity, for $8.6 million in 1967. That investment got him $19.4 million that he could invest. By 1970, Buffett’s insurance businesses were generating $39 million that he could invest…

Today, GEICO et al is generating around $150 billion in investible cash a year. 

Buffett geico

Which explains those GEICO ads…

The Case for Lemonade (NASDAQ: LMND)

Current Price: $15
52-week Range: $10.28 – $32.97
Market Cap: $1 billion
2023 Revenue (est): $398 million
2024 Revenue (est): $462 million
P/E Ratio: N/A
Price to Sales: 3
12 month Target: $34

On May 3, I told you: 

I really want to recommend disruptive insurance company Lemonade (NASDAQ: LMND) at the current price of $11.25. The company has great potential, has executed well, and the stock is currently trading at about 2x forward 12-month revenue, which, for a growth stock, isn’t bad…

But my goodness the chart is ugly. The current price ($11.25) is just above a new recent all-time low. The 50-day moving average is 20% higher at $13.48 and the stock has to run 64% just to get to its 200-day moving average at $18.49.

Now, of course, Lemonade is no GEICO, and Chairman and CEO Daniel Scheiber is no Warren Buffett. But this upstart insurance company is past the point of proving that its business model is viable. Lemonade has reached the point where it is firmly on the road to profitability. 

And I think I can spell out the reasons why pretty simply, from its most recent quarterly earnings  conference call… 

Lemonade grew its net revenue 115% over last year’s first quarter, to $95 million. The number of customers grew 23% to 1.9 million. Per customer premiums grew 26%. Total in-force premiums grew 56%, to $652 million. 

The portion of premiums that were paid out to reinsurers fell to 56%, from 71% last year. That’s particularly impressive.

But perhaps most impressive is that Lemonade accomplished this level of growth while cutting sales and marketing expenses by 26%, or $10 million. The reinsurance contracts renew on July 1, it’s reasonable to think new terms will be more favorable to Lemonade considering it now has a longer operational history. 

There are a couple reasons to think more upside for revenue is ahead. For one, Lemonade is raising prices. The stat I noted above about per customer premiums growing 26% is evidence that higher prices are being accepted. Insurance companies have to apply to their regulators to get approval for rate hikes, and Lemonade says they have filed 30% more applications to raise prices than last year. Higher premium prices will continue to go into effect for the rest of the year as existing policies renew. 

Lemonade currently offers home, renters, life and pet insurance. Renters insurance is available in 29 states. Home insurance is available in 23 states (here’s the list of services and where they are offered).

It is just starting to roll out car insurance, and that’s available in just 5 states: Tennessee, Texas, Ohio, Oregon and Illinois. 

Point being: there is a lot of growth coming as Lemonade fills out its geographic footprint. And given the operational efficiencies the company has achieved, Lemonade is a good bet. 

Lemonade has over $900 million cash and no debt to speak of. It should have no problem funding its growth. And with a market capitalization of just over $1 billion, you’re paying very little for that growth.

Lemonade (NASDAQ: LMND) is a great long-term stock to own. Obviously, the stock launched higher after reporting a truly surprising quarter last week. The 50-day moving average is down around $13.50, and I can’t say I’d be surprised to see it trade down to that level. But a year from now, I don’t think you’re gonna care if you bought it at $15 or $13.50.

That’s it for me today. Take care, have a great weekend and I’ll talk to you on Monday.

Briton Ryle
Chief Investment Strategist
Pro Trader Today