Lemonade Turned Out to Just Be a Lemon

Back in January, when given an opportunity to buy Lemonade (NYSE:LMND) stock, I passed.

LMND stock logo displayed on smartphone laying on top of computer keyboard.

Source: Stephanie L Sanchez / Shutterstock.com

“The numbers should sour investors on the shares,” I wrote. At the time Lemonade stock was selling at $183 per share.

On May 24, it closed at $78.40. I take no credit for that. I take no joy in it. It’s the numbers, which are still god-awful. Hide them at the back of a hype-filled shareholder letter all you want. But revenue dropped to $23.5 million from $26.2 million in the first quarter of 2020. Losses were up to $49 million, compared to $36.5 million in the first quarter of 2020. The reason the per-share loss was lower, 81 cents versus $3.16, was that there were nearly six times as many shares.

LMND Stock Seemed to Make Sense

The ideas behind Lemonade still make great sense.

All financial services, from banks to loans to insurance contracts, are becoming apps. The overhead of big downtown offices is being replaced by algorithms in the cloud.

Lemonade was created to take advantage of this. It uses machine learning for its risk management. It lays off 75% of its premium to reinsurers, limiting risk exposure. The idea is that snappy advertising will encourage young adults to buy pet and renters’ policies online. Then they’ll reflexively grab the same company’s car and life policies as they age.

Lemonade has big ambitions. These extend into Europe as well as the U.S., and across a broad front of policies. This will let Lemonade bundle coverages.

LMND stock was one of the great picks of 2020. It went public last July at $29. Anyone who rode it to its high is still looking at a fat profit. But its valuation, based on revenue, made no sense to short-sellers like Friendly Bear.

Shorts have been making the big profits on this stock in 2021. As of April 30, about 23% of shares were being held by shorts, who had borrowed the stock with the promise to buy it back cheaper.

The Problem

The problem for Lemonade is that its secret sauce is not a secret.

Consumer insurance companies like Berkshire Hathaway’s (NYSE:BRK-A, NYSE:BRK-B) Geico, Allstate (NYSE:ALL), Progressive (NYSE:PGR), along with privately held Liberty Mutual and State Farm, already charge based on customer behavior. They all bundle policies. They also all have quirky advertisements. The profitability of consumer insurance has made this a popular advertising category.

So, if you’re going to succeed at this business, your online systems need to execute flawlessly. Lemonade’s have problems. Carson Block, a short seller doing business as Muddy Waters, wrote this month it has a fundamental flaw. How fundamental? One of Block’s security experts was able to download another customer’s renter’s policy within 15 minutes.

Once Block found the bug, he shorted Lemonade. Lemonade, however, dismissed the story. Co-founder Shai Wininger tweeted that what Muddy Waters found were quotes shared by users themselves. Shares are up 30% since the story of the short broke.

The Bottom Line on LMND Stock

I’m not worried about Lemonade’s technology problems or its arguments with short sellers. Those can be fixed. Shorts can be squeezed.

I am worried about whether Lemonade has something unique that can gain market share.

Insurance has adapted well to the online world, especially in the highly profitable categories where Lemonade seeks to make its name. Lemonade’s efforts so far have also been marked by losses, while its rivals are consistently profitable.

The argument is that Lemonade’s lower costs can deliver lower prices, but scaled competitors already seem onto its tricks. Big casualty insurers are cutting back on human agents, doing their work online, and managing risks in the cloud.

Next to all that, this is just a lemonade stand.

On the date of publication, Dana Blankenhorn did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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 danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his Substack.


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