Here’s Why I Think Lemonade Could Be a 10-Bagger Opportunity

Insurance disruptor Lemonade ( LMND 1.16% ) hasn’t exactly been a high-performing stock lately, but there could be some major growth drivers at work in the business. In this Fool Live video clip, recorded on Nov. 22, Fool.com contributor Matt Frankel and Industry Focus host Jason Moser discuss some of the big growth catalysts that could take the company to the next level. 

Jason Moser: We get asked the question, is it a value play or value trap? I think I know how you’re going to answer this.

Matt Frankel: Sure.

Moser: I would tend to agree. I don’t think this is a business that’s fundamentally flawed or challenged, a lot of times that’s what a value trap ultimately is, is you can’t really find that road to recovery so to speak. It really does look like Lemonade given how young of a business it is and how it’s trying to disrupt a very traditional and difficult to disrupt market. Fintech has been a big opportunity in a lot of ways and it feels like Lemonade is right there. But let’s definitely dig into that auto insurance side of it because I’ve had experience interestingly enough on both sides of this. Of course, as a consumer, we have auto insurance and you have to obviously have that. I’ve also worked on the auto insurance side of the business.

I used to work at Travelers Insurance ( TRV 1.78% ) before I actually came up here to the Fool. I was in their auto insurance department for a year getting ready to jump into their underwriting program before I actually got this job. I can tell, auto insurance, it’s a brutal business to work in, it’s really hard. The one thing that opened my eyes was just how many claims come in on that side of the business. There are just so many car wrecks. I was just floored. There is I’m sure, plenty of room for fraud and opportunity to scam, but generally speaking, it feels like auto insurance, it’s a pretty high-volume business, and if Lemonade is trying to make it better, hey, listen I respect that.

Frankel: Auto insurance is a massive market to go after, which is why everyone at Lemonade is so excited about it anyway. Renter’s insurance market collectively, Americans spend about $4 billion a year on renter’s insurance. In auto insurance, it’s $288 billion.

Moser: Holy cow.

Frankel: It’s not even comparable when it comes to market size. Lemonade estimates that its current customers spend over $1 billion a year in auto insurance premiums. Lemonade’s total in-force premium is $347 million. Their current customers spend about triple the amount on auto insurance that Lemonade is bringing in altogether, and that’s just with its existing customers. Big opportunity. They have just recently announced they are acquiring Metromile ( MILE 1.33% ). I don’t know if you saw that.

Moser: I did, yeah. I remember you mentioned that.

Frankel: You think Lemonade’s stock did poorly, Metromile’s stock has really done poorly since it went public. That was the SPAC. It was one of the ones that Chamath Palihapitiya led the PIPE round on. Your premium is based on how much you drive, so it’s an interesting business model. Lemonade is acquiring them in an all-stock deal, and I can’t emphasize this enough, they are getting a steal.

Here’s why. Lemonade’s giving one share of its stock for every 19 Metromile shares investors own. It’s like a $2 or $3 stock. At the time the transaction was announced, it valued Metromile at about $500 million. Lemonade’s stock plunged after earnings because apparently, investors don’t like the steal, they didn’t like the loss ratios, they didn’t like a few things in their earnings report. Now Lemonade is effectively paying $340 million for this because it’s an all-stock deal and its stock is cheaper. Metromile has more than $250 million in cash on its balance sheet. Lemonade is getting this business for almost nothing. Well, under $100 million is what they are effectively paying for the business.

Moser: Now given Metromile’s performance to date and obviously businesses had some challenges, but you still like the fundamentals of that business being a part of Lemonade’s family?

Frankel: Well here’s why, Lemonade is paying about $80 million essentially for Metromile’s business; $80 million, in the context of what we’re talking about, is like nothing. Lemonade has auto insurance licenses in one state so far, Illinois. They are about to roll out Tennessee and then they were gradually going to roll out nationwide. Metromile already has 49 state auto insurance licenses. That really accelerates the rollout a little bit.

Moser: Yeah it does.

Frankel: Metromile already has $100 million of in-force auto insurance premium. Metromile also has data from billions of miles of customer driving activity, over 400 million customer trips that they’ve been tracking data on. When you talk about Lemonade, which is a data-driven AI platform, all that data is worth its weight in gold. They’re getting an absolute steal on Metromile. If you believe like I do the auto insurance is the story with Lemonade and the reason to pay what you’re paying for it, I can’t emphasize enough how much I like the Metromile deal.

Moser: Well, then circling back to the ultimate takeaway here for us, for our listeners, knowing what you know today in regard to this business, would you buy the stock today?

Frankel: Over the weekend, I published an article called, here’s why I’m about to double-down on Lemonade, so that should give you your answer. As soon as I can stop talking about it, right now I just reset the clock because we’re talking about it now, but as soon as the allowed to I’m going to buy some more shares of it.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.