IPO Launch: Lemonade Proposes Terms For $270 Million IPO

IPOStreet

Lemonade (LMND) intends to raise $270 million from the sale of its common stock, according to an amended registration statement.

The company provides an online site that sells renters and homeowners insurance directly to consumers in the U.S.

LMND is growing revenue but the IPO appears pricey and the company is burning through high amounts of operating cash.

Note: On July 1, 2020, Lemonade amended its proposed terms, increasing its proposed midpoint share price from $24.50 to $27.00. No change to my opinion.

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To listen to an audio version of this report, click on the graphic below:

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New York, NY-based Lemonade was founded to create an online platform to provide renters and homeowners with insurance information and the ability to bind coverage.

Management is led by co-founder, Chairman and CEO Daniel Schreiber, who was previously president of Powermat Technologies, a wireless charging company.

Below is a brief overview video of an interview of CEO Schreiber:

Source: CNBC

The company’s primary offerings include Renters and Homeowners insurance coverage. Lemonade has plans to expand into additional insurance categories in the future.

The firm’s website uses machine learning-enabled chat bots to more quickly assist prospective clients to learn about and purchase the right coverage for their needs.

The company is registered as a Public Benefit Corporation and seeks to use the profits from premiums for donation to a charity of the client's choice and in doing so reduce excess claims.

Lemonade has received at least $480 million from investors including SoftBank, Sequoia Capital, Aleph, XL Innovate and General Catalyst Partners.

The company devotes a large amount of marketing via online 'search engines, social media platforms, digital application stores, content-based online advertising' to get users to download its app.

The firm purchases search engine advertising and is active in generating earned social visibility as well.

Sales & Marketing expenses as a percentage of total revenue have been dropping as revenues have increased.

The Sales & Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Sales & Marketing spend, rose to 0.8x in the most recent reporting period.

As a proxy for the growth trajectory of online insurance, according to a 2020 market research report by IBISWorld, the market for online insurance brokerage is expected to reach $31.3 billion in 2020.

The average annual growth in online insurance was approximately 9.0% from 2015 to 2020.

The main drivers for this expected growth are an increased comfort level of usage of online information and coverage sources for insurance as well as improved technology offerings to automate the process for consumers.

Major competitive or other industry participants include:

  • GEICO
  • Progressive Casualty
  • State Farm
  • Allstate Insurance (ALL)

Management says its use of advanced A.I. technologies help to streamline the entire process of learning about and purchasing insurance, at least for the categories of homeowners and renters insurance.

Lemonade’s recent financial results can be summarized as follows:

  • Growing topline revenue, but at a decelerating rate of growth
  • High and increasing net losses
  • Uneven and high cash used in operations

Below are relevant financial results derived from the firm’s registration statement:

lemonadepl

Source: Company registration statement

As of March 31, 2020, Lemonade had $274.2 million in cash and $124.3 million in total liabilities.

Free cash flow during the twelve months ended March 31, 2020, was negative ($79.9 million).

LMND intends to sell 11 million shares of common stock at a midpoint price of $24.50 per share for gross proceeds of approximately $270.0 million, not including the sale of customary underwriter options.

Entities associated with private equity firm Baillie Gifford have indicated an interest to purchase shares of up to $100 million at the IPO price. This is a positive signal of support for the IPO’s valuation.

Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO would approximate $1.1 billion.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 20.04%.

Per the firm’s most recent regulatory filing, the firm plans to use the net proceeds ‘for general corporate purposes, including working capital, operating expenses, and capital expenditures.’

Management’s presentation of the company roadshow is not available.

Listed underwriters of the IPO are Goldman Sachs, Morgan Stanley, Allen & Company, Barclays, JMP Securities, Oppenheimer & Co., William Blair and Liontree.

Commentary

LMND is seeking public investment capital to continue scaling its operations on its mission to digitize insurance coverage.

The firm’s financials show strong revenue growth, although at a decelerating rate.

Sales and marketing expenses as a percentage of total revenue have been dropping as revenue has increased and its sales & marketing efficiency ratio has increased.

The market opportunity for various types of insurance is enormous, but a question I have is how well the firm will be able to automate the more complicated and involved types of insurance, such as property and casualty and specialty lines.

Also, the IPO represents a 42% down round valuation from its most recent private market raise from SoftBank, noted for paying high valuations to place large amounts of funding with fast-growing firms.

SoftBank is the largest single shareholder, with 27.3% ownership pre-IPO.

LMND has improved its net and gross loss ratios as it has grown, as the chart shows below:

lemonadelosses

Source: Company registration statement

Goldman Sachs is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 110.7% since their IPO. This is a top-tier performance for all major underwriters during the period.

As a comparable-based valuation, LMND is proposing to value itself at an EV/Sales of nearly 15x that of incumbent firm Allstate.

LMND is, of course, growing revenue much faster and has a different business model that has the potential to deliver higher profits at scale due to its digital nature.

The question for IPO investors is whether you want to pay that 15x higher EV/Sales valuation for a company that is still losing a lot of money and burning through significant operating cash flow.

Also, LMND’s ‘public benefit’ corporation status also leaves me wondering whether it will operate in the best interests of the shareholders.

Given the high IPO pricing, heavy cash burn and net losses and corporate status, my opinion on the IPO is NEUTRAL.

Expected IPO Pricing Date: July 1, 2020.

Glossary Of Terms

(I have no position in any stocks mentioned as of the article date, no plans to initiate any positions within the next 48 hours, and no business relationship with any company whose stock is mentioned in this article. IPO stocks can be very volatile in the days immediately after an IPO. Information provided is for educational purposes only, may be incomplete or out of date, and does not constitute financial, legal, or investment advice.)

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