A hot IPO stock, Lemonade (NYSE:LMND) hasn’t had a good start to the year. The company did not impress investors after recent quarterly results and LMND stock dropped as a result. It has literally gone nowhere over the past month, the stock was trading at $25 in February and is trading in the same range today.
Sure, you could say it’s up a few dollars. But what’s a few dollars if I told you it used to trade for over $100? What was once trading at the highs of $115 is now inching closer to the lows of $25 and there is reason enough to be worried about the future of the stock. In my last coverage of LMND stock, it was trading at $21 and I had mentioned that profitability is a huge issue. It continues to remain a red flag for the company.
The New York-based company has a lot to work on and investors should not expect LMND stock to soar anytime soon. It has reported impressive numbers in the past and it certainly has the potential to win the market, but it will take time. With that in mind, let’s consider the two red flags you must watch out for.
Very High Gross Loss Ratio
Lemonade has a gross loss ratio as high as 96%, which has led to a rise in overall net loss. This ratio is the percentage of gross claims to gross premiums in a year. An ideal loss ratio is between 40% to 60%. Lemonade wants to keep it under 75%. The ratio was 73% a year ago. The company can’t begin to show a profit until it reduces this ratio.
When a ratio is as high as 96%, it is not possible to report a profit. Most of its revenue is going towards losses and even if the company manages to increase the revenue 100% year over year, the loss will eat it up. Unless Lemonade manages to reduce the gross loss ratio, it will become difficult for it to win the trust of investors.
Focusing on Several Products at The Same Time
Lemonade initially started with one product and then expanded across different product lines before the company could prove its original product brought in revenue. In a very short span of eighteen months, Lemonade has gone from focusing on one product to five.
It’s a gamble when a company adopts this strategy. Typically, a company likes to find its focus and turn that business profitable before diversifying. Lemonade’s diversification so far hasn’t done much for it as losses continue to pile up. It also entered the heavily competitive auto insurance market recently.
If Lemonade had just focused on a single product, proved themselves and gradually worked towards entering the other lines, it would have been easier for the company to manage losses. The market is large, there is heavy competition and Lemonade needs to have a strategy to grow its products while keeping expenses low.
The Bottom Line on LMND Stock
Lemonade’s business is not the problem. The company is well placed in the industry and I like its business model. It has potential and its numbers prove that there are customers as well. But, as investors, we are keen to know when the company will make profits. This is where the trouble begins. Until the company manages to handle the expenses, it will continue to have trouble in the short term.
Fundamentally, there is a lot that Lemonade needs to work on, and reducing the gross loss ratio is just the first step. At this stage, it is best to sit out and watch how LMND stock moves. Do not take a position just yet.
On the date of publication, Vandita Jadeja 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.
