Lemonade Delivers Sweet Results, Price Reversal to Accelerate

Key Points

• Lemonade is gaining traction with new clients and penetration in 2025. 
• The company is on track for profits by the end of 2026. 
• Short-interest, institutional, and analyst trends have this market set up to accelerate a reversal.

Lemonade’s NYSE: LMND stock price action entered a reversal in 2024 and is positioned to accelerate the move in 2025.

The Q1 results and guidance affirmed the outlook and included a pathway to profits. It will still take some time, but the company is on track to reach EBITDA break-even by the end of 2026. 

Among the critical takeaways from the report is that AI is aiding in customer acceleration, reducing costs, and improving efficiency, resulting in a double-digit improvement in margin.

Assuming these trends remain in force, the company’s guidance is likely low. 

Nothing Sour in Lemonade’s Q1 Results and Guidance

Lemonade had a robust quarter with growth accelerating to 27%, the 6th quarter of year-over-year (YOY) acceleration, and outperforming MarketBeat’s reported consensus. The top line beat the forecast by more than 400 basis points on a 21% increase in clients, a 27% increase in in-force premiums, and increased net investment income. The premium per customer grew by 4%, reflecting improved leverage and penetration, with only ADR in decline. ADR, or the percentage of revenue retained over 12 months, declined by 400 bps due to the non-renewal of policies. It is a headwind in Q1 and Q2, but will ultimately aid earnings quality over time. 

The company's margin is impressive. It maintained its margin despite the impact of California wildfires, leaving the adjusted gross margin up roughly 25%. The company continues to post losses, but less than expected, with the -$0.86 in GAAP earnings nearly 1000 bps better than forecasted. Regarding the guidance, the company raised its expectations for another sequential and YOY acceleration in revenue, and the forecast may be light. 

The forecast may be light because Lemonade Car, the business's car insurance segment, is gaining traction. Execs report that this segment is leading with sequential growth and nearing its inflection point. Attractions for its users include telematics and location-based premium quotes that provide value and savings. Attractions for the business are the margin and opportunities for cross-selling and upselling. The recent addition of Colorado brings coverage to 40% of the U.S., with additional territories expected for inclusion later this year. 

Analysts Trends Set Up Catalyst for Lemonade Market

Analyst trends have influenced Lemonade’s stock price action over the past few years. Once rated a hot Buy with ample upside potential, the ratings from those still covering the stock fell to a consensus of Reduce, with a price target implying fair value near early May trading levels. The catalyst is a shift in sentiment that the Q1 release may spark. Improving user counts, expanding territories, and increasing operational quality can improve analysts' sentiment and lead to an upgrade cycle. 

Institutional activity aligns with the forecast for stock price reversal. The institutions own over 80% of the financial services stock and are buying in 2025. The risk is that Softbank, a major shareholder with roughly 10% of the shares, has been selling regularly over the past year and may continue to be a headwind for this market in 2025. 

Short Interest Is a Concern for Lemonade Investors in 2025 

Short interest is a concern for Lemonade investors and may cap gains this year. The short interest rate is remarkably high at 30% as of mid-April, which is a significant headwind for the market. However, at 30% short, this market is also set up for a substantial short squeeze, given the appropriate catalyst. That could come with the Q2 results and guidance update, scheduled for early August. If not, this market is doomed to wallow near its current levels or lower until profitability is closer at hand.