Banks and insurance companies are disappearing. They’re being replaced by apps, by “fintech” companies. The newcomers automate all the front-and-back office operations that previously employed millions of people. Yet, not all fintech plays are winners. In fact, most are overvalued in a world awash in cash looking for somewhere to go.
This brings us to Lemonade (NYSE:LMND). It’s an insurance fintech, based in New York and Tel Aviv. It writes personal liability policies, and it has ambitions in term life insurance. It “set out to replace brokers and bureaucracy with bots and machine learning, aiming for zero paperwork and instant everything,” so goes the website.
It went public June 4, with 11 million shares priced at $11 each. It closed Jan. 8 at about $160, which gave it a market capitalization of $9.09 billion.
The expected 2020 revenue, according to the company’s third quarter earnings report? About $91 million-$93 million.
Does LMND Stock Have Any There, There?
You don’t have to be a professional short seller to see this as a ridiculous valuation. A short called Friendly Bear said at year-end this insurance emperor has no financial clothes.
He’s not just talking about the valuation. He says Lemonade’s customer acquisition is slowing. He says it has no special technology, and its claims of philanthropy are hot air. Our Mark Hake covered the claim after previously writing about Lemonade’s underwriting losses. Even if you ignore Friendly Bear’s claims of fraud, he wrote, the price of the stock is 65% too high.
Since Hake’s story came out last week, the stock is up another 35%.
Crazy Market Driving Value
“Lemonade is hitting on all the buzz-themes of the future,” he wrote. That’s where my own “spidey sense” kicks in. The Q3 report is extremely well written. It’s more of a sales brochure than a financial report. It claims a command of underwriting because, despite the California wildfires and East coast hurricanes, its gross loss ratio improved year-over-year, from 78% to 72%. (I don’t know who it insured or for what. Using that number as evidence of genius is nonsense.)
The report also talked about Lemonade’s addition of pet insurance. It teased an entry into term life insurance, which is an $800 billion market. It announced a move into France.
It all sounds too good to be true. Which means it is.
For the quarter ending in September, Lemonade reported a loss of $30.5 million, 57 cents per share, on revenue of $17.8 million. Losses came to $6.7 million, other insurance expenses $3.5 million. Most of the net loss was attributed to marketing and technology expenses.
The balance sheet showed assets of $831 million, double last year’s $414 million, against liabilities of $262 million. Operating cash flow was negative, by $71 million, and cash from investments was just $36 million. The biggest number was financing cash, basically from sales of stock, which came to about $340 million.
Notice something missing here? It’s anything starting the letter b. B as in billion. The only billion is the market cap.
The Bottom Line
This Lemonade stand is a slick package, a nice web site, some chopped word salad, and a lot of hope.
The company is on the cusp of a powerful trend, but it’s up against powerful foes. Most insurers companies, like Allstate (NYSE:ALL), are valued based on their gross earned premiums, about $35.8 billion last year, according to Hake. Allstate’s market cap is $33.5 billion.
Hake estimates Lemonade’s gross earned premium for 2020 at $171.6 million. It’s trading at more than 50 times that number. No wonder that industry trade journal Insurance Insider described the initial public offering as “a unicorn vomiting a rainbow.”
I was around in 1999. I saw the dot-com bubble, and I saw the crash that followed. This is what it looked like, speculators chasing rainbows and then left to clean up the mess.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at email@example.com, tweet him at @danablankenhorn, or subscribe to his Substack newsletter. At the time of publication he owned no shares in companies mentioned in this article.