We came across a bullish thesis on Lemonade, Inc. (LMND) on Substack by Steve Wagner. In this article, we will summarize the bulls’ thesis on LMND. Lemonade, Inc. (LMND)'s share was trading at $31.48 as of Feb 26th.
A business man with a confident pose discussing details of a property & casualty insurance claim.
Lemonade (LMND) delivered a strong Q4 and full-year 2024 performance, surpassing analyst expectations on revenue and EPS. However, weaker-than-expected guidance for 2025 triggered a temporary sell-off. For Q1 2025, the company projects revenue between $143M and $145M, below the $151.4M consensus estimate, and a full-year forecast of $655M-$657M, missing the $667.5M expectation. Despite this, LMND’s operational performance showed significant improvements, with record revenue growth, enhanced loss ratios, and positive free cash flow, marking a pivotal moment in its journey toward profitability. The company’s Q4 revenue of $148.8M reflected a 29% YoY increase, driven by higher gross earned premium, ceding commission income, and net investment income. In Force Premium (IFP) grew 26% YoY to $943.7M, marking five consecutive quarters of accelerating growth. Premium per customer increased 5% YoY to $388, reflecting stronger monetization as customers purchased higher-value policies and renewed at higher rates. Profitability also improved, with LMND narrowing its net loss to $30M, a 29% YoY improvement, and gross profit surging 90% YoY to $63.9M as margins expanded from 29% to 43%. Additionally, LMND generated $26.5M in adjusted free cash flow, its second consecutive quarter of positive FCF, underscoring its improving financial discipline.
A key driver of LMND’s performance was its continued progress in loss ratio improvement. Its Gross Loss Ratio (GLR) declined to 63% in Q4, a dramatic improvement from 77% in the prior year’s quarter, marking six consecutive quarters of better underwriting results. The trailing twelve-month GLR fell from 85% in 2023 to 73%, highlighting the effectiveness of LMND’s AI-driven underwriting models. However, management warned of a temporary Q1 2025 spike in GLR due to $45M in wildfire-related losses, with a $20M EBITDA impact. Despite this, LMND expects ongoing loss ratio improvements in 2025 as rate adjustments take effect. For the full year, LMND’s revenue grew 23% YoY to $526.5M, while gross profit nearly doubled to $166.9M. Net loss improved 15% YoY to $202.2M, reflecting better expense discipline. Importantly, LMND achieved its first full year of positive adjusted free cash flow at $48M, a critical milestone for long-term sustainability. With $1B in total cash and investments, the company remains well-capitalized, ensuring ample runway for further expansion.
While LMND remains unprofitable on a GAAP basis, its improving cash flow profile and declining loss ratios suggest a clear path toward profitability. Growth spending remains a priority, with planned marketing and customer acquisition expenses set to rise to ~$165M in 2025, temporarily delaying GAAP profitability but fueling market share expansion. The long-term goal remains sustained Adjusted EBITDA profitability by 2026, followed by GAAP profitability. Despite short-term skepticism, LMND’s trajectory resembles other high-growth insurers that initially posted losses before achieving sustainable profitability. While some investors focus on current losses, others recognize a business on the cusp of becoming a cash flow machine as underwriting models continue improving. Given strong execution, improving financials, and a resilient cash position, LMND presents a compelling long-term opportunity.
The company’s approach to car insurance expansion further reinforces its strategic discipline. Despite a massive 700,000-person waitlist, LMND is prioritizing long-term profitability over rapid growth, ensuring its AI-driven underwriting model is fully refined before scaling. This cautious strategy stems from the complexities of the auto insurance market, where many competitors have expanded too quickly and suffered losses. CEO Daniel Schreiber compared LMND’s strategy to “revving the engines but not putting the car into first gear fully yet,” emphasizing sustainable growth. Over the next two years, LMND plans a gradual rollout into new states, incrementally expanding its customer base. The auto insurance market represents a significant opportunity, and even a small market share capture could meaningfully impact LMND’s revenue trajectory. Unlike its other product lines that require customer education, car insurance enjoys high demand and broad consumer understanding. By leveraging AI underwriting with a disciplined rollout, LMND aims to establish a profitable foothold in the competitive market.
Valuation-wise, a Reverse Discounted Cash Flow (RDCF) projects LMND’s revenue growth over the next decade, incorporating historical trends and future expansion plans. The company is expected to grow revenue by 27% annually from 2025-2026, tapering to 24% in 2026-2027 before stabilizing at 17% by 2035. This assumes successful scaling across multiple insurance verticals, with revenue projected to rise from $526.5M in 2024 to between $15B-$18B by 2035.
LMND’s declining growth expenditures are a crucial factor in this projection. After a year and a half, peak spending is expected to decline by $80M-$100M, significantly lowering operating expenses. While LMND will continue investing in customer acquisition, the focus will shift from hyper-growth to sustainable expansion, enhancing profitability while maintaining strong growth momentum. Operating expenses (opex) and customer acquisition costs (CAC) are key components of this strategy. Unlike traditional insurers reliant on physical infrastructure, LMND’s tech-driven model enables a lean cost structure. Opex is expected to rise from $88M in 2024 to $125M by 2035, while CAC should level off at $60M-$65M annually by late 2026, signaling a shift toward organic retention and steady premium growth.
As LMND's free cash flow improves, its valuation should see a meaningful rerating. The company’s AI-driven underwriting, disciplined expansion, and financial progress position it as a disruptive force in insurance. If LMND successfully scales and controls costs, its long-term upside could be substantial, with an intrinsic share price projected between $80-$120.
Lemonade, Inc. (LMND) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 25 hedge fund portfolios held LMND at the end of the third quarter which was 16 in the previous quarter. While we acknowledge the risk and potential of LMND as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than LMND but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
