This AI Stock is Planning to (Re)Accelerate Growth

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You might have noticed that Lemonade shares plunged more than 25% the day after the AI-enabled insurance platform announced fourth-quarter results two weeks ago.

What most headlines didn’t point out, however, was that the quick plunge came after a roughly equivalent (and unusual) rally that preceded Lemonade’s technically better-than-expected results:

So let’s zoom out to ignore the earnings-related blip in the radar, and focus instead on the actual state of Lemonade’s underlying business:

• In-force premium (IFP) grew 20% year over year to $747 million, better than expected

• Adjusted EBITDA loss contracted 44% year over year to $29 million (from a loss of $42 million a year ago)

• Premium per customer grew 7% to $369

• Total customers at year end increased 12% to 2,026,918

• Gross loss ratio contracted 12 percentage points year over year to 77% — its first dip into the 70’s percent range in two years and closing in on the company’s target for the metric to stay consistently below 75%.

• Net operating cash flow was negative $119.1 million (narrowed from operating cash burn of $163 million a year earlier)

A more interesting point raised by management in their quarterly letter to shareholders, however, is that for the first time in company history Lemonade’s top and bottom lines are finally both consistently moving in the same direction — that is, up and to the right:

Similarly — and noting Lemonade previously made the conscious decision to scale back its growth spending, partly in order to allow lagging rate-hike approvals to catch up with inflationary pressure over the past few quarters — Lemonade says it’s now planning to roughly double its growth spend in 2024 (from $55M in 2023). It will partly do so by expanding the use of its Synthetic Agents program (read an excellent overview of that program on Lemonade’s blog here) from funding 50% of growth spend in the first half of last year to 80% in the first half of 2024. This should enable the company to re-accelerate IFP growth back to its CAGR target of at least 25% by the end of 2024.

As such, Lemonade expects net cash flow to turn consistently positive by the first half of 2025 — meaning its cash hoard (cash and investments stood at $945M at year-end 2023) will only steadily grow from here — with operating cash flow turning consistently positive by the end of 2025.

This means Lemonade remains on track to make good on management’s pledge to achieve sustained profitability without raising additional capital — something I’ve previously made clear is key to my thesis for owning shares as the business demonstrates improving economies of scale.

But why didn’t Lemonade stock rally in light of its impending growth acceleration? Wall Street obviously wanted to see a more pronounced re-acceleration in top-line growth this year.

Given Lemonade’s propensity for underpromising and overdelivering, however, I’d be surprised if it hasn’t significantly outperformed when all is said and done in 2024.

The bottom line: With Lemonade shares trading on the year, I think patient, long-term investors should count their blessings that its brief pre-earnings pop didn’t hold. For those who use this as an opportunity to open or add to their positions, I think Lemonade remains one of the market’s most compelling AI stocks.

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