$LMND just did 20% in the Last Week. A 10x Opportunity

MMMTWealth
06-09

Here's what you need to know about this 10x opportunity $Lemonade, Inc.(LMND)$

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I've been investing into $LMND for a long time now and I've built the position to be the biggest in my portfolio now. I'd love to welcome counter arguments to the below thesis so please do come forward and attack the name if you disagree...

I have a big position in $LMND now (relative to the size of my portfolio) purely because I believe the opportunity ahead when they inflect to profitability will be huge. To be honest, it's one of the few names in the market that I feel very comfortable loading up on at today's prices. I write about $LMND in alot of my newsletter and my spreadsheets for my paid subs so here goes. This one is long but I hope it helps a few of you:

What do LMND do?

LMND are an insure tech firm competing in renters, homeowners, pet, life, and now car insurance. They operate predominantly in the US but have small presence in the UK, France, Netherlands, and Germany. They've built their whole business around automation which basically means the cost efficiency they'll get as the business scales will completely set them apart from traditional incumbent insurance firms like $PGR $CHB who find it almost impossible to grow margins because more business means more agents.

What's to like about LMND? (Short answer)

  • IFP (in force premiums) up 27% YoY. Management guiding for 30% YoY growth and 10x over the next 8-9 years. Operating expenses (excluding growth spend) flat since 2022. Car growth outplaced all other segments. Customer growth +21% and spend per customer +4% In short, for a small cap company, $LMND has so much control over their growth.

  • Management even said: "We grow at a pace of our own choosing." If they're looking to accelerate the topline, they can. If they're looking to push profitability, they can. There are not many small cap companies that can do this. $LMND currently trade at a $2.9B market cap (was $1.9B just 2 months ago) with ~$1B in cash and cash equivalents meaning the EV is ~$1.9B.

  • Therefore, with $668M estimates for FY25 revenue figures and a 50% gross margin, $LMND are trading at 5.6x EV/GP whilst growing gross profit at 23.7%. If you simply do a EV/GP/Growth calculation and compare $LMND to other companies like $PGR $HIMS $NVDA $PLTR $SOFI $HOOD $GRAB then $LMND is a pretty good investment based purely on that.

What's to like about $LMND (Long answer)

Business:

This is a Gen-AI native company that has invested huge amounts into building an AI platform from the ground up. This creates huge leverage vs competitors who are fighting traditional processes and AI which quite simply lacks the efficiency that $LMND create. They can grow revenue at scale (as quickly as they see fit) whilst ensuring that OpEx and headcount won't increase in line with revenue.

Unit Economics:

$LMND has very strong unit economics. Currently the LTV/CAC is ~3-4x so although spend on growth is substantial, there's absolutely no reason $LMND shouldn't continue to invest heavily there. The other side of the unit economics is looking at IFP vs total operating expenses. If you look at the chart below, you'll see huge IFP growth vs very low operating expenses (excluding growth spend)

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This will continue to happen. The company is an autonomous machine that'll allow them to continue to scale this top line with very little increase in operating expenses.

So, CAC is increasing but LTV/CAC is consistently above 3. Anything outside of CAC is extremely stable. That's a sign of a damn good business.

I see some bear arguments scattered around X on $LMND such as management keep talking about this autonomous and profitable company but if you look at the actual numbers, they're not anywhere near that.

My response? Correct. But you have to look at the trends. $LMND are more than happy to hurt the financials today with high CAC because the return on investment over the next decade is huge. $LMND are slowly, but surely, building a defensible and autonomous organization that will reap huge rewards in the coming years and all you have to do to spot it is to look at the clear and obvious trends...not the numbers today.

Valuation

I did a simple look at EV/GP/Growth earlier but let's so some more modelling here (simple modelling). I'll leave the more complex models I've created to my paid subscribers and my spreadsheets. $LMND management have said they'll compound revenue at the 30% range for the next couple years. If we look out to 2030 then I think a fair estimate is a 25% CAGR.

So based on $670M analyst estimates for FY25 and a 25% CAGR through to 2030, $LMND should hit $2.04B in revenue in 2030. Now margins: GP margins currently sit at 43% but have been as high as 57%. We care more about EBITDA margins, FCF, and net income margins though. EBITDA is meant to inflect positively in 2026 and net margins in 2027. If $LMND can hit a 10% EBITDA margin by 2030 (after saying they're looking to inflect positively in 2026 making this a very conservative estimate), then I estimate ~$204M in EBITDA in 2030.

$PGR currently trades at 11x EBITDA and $CB at 10.7x EBITDA. Considering $LMND would be growing EBITDA FAR quicker than these incumbents, I think a 20x multiple would be more than fair. $204M in EBITDA * 20x EBITDA multiple = $4.08B which gives a 2x on the EV today.

To me, that's the most conservative I can get. I've used very low EBITDA margins, fair growth, and a pretty low multiple considering $LMND is an internationally growing, tech disruptor, that currently is one of the few AI native insurance companies.

To get slightly more bullish, here's what I think: My model gives $2.9 EPS by 2030 (I'll share this at some point). Essentially, it's based on ~5B in IFP by 2030 (I think they 10x IFP by 2034/2025 ish meaning $10B by then).

Based on this IFP, I get to a $2.9 EPS by 2030. Then the PE multiple to choose: Let's say a 30x PE. That equals $87 (conservative) 40x PE = $116 (slightly fairer).

The reason I say 30x is far too conservative is because my model suggests revenue growth will be just below 30% YoY by that point with EBITDA, EPS, and FCF all growing far more than 30%. Even based on the numbers in my model 40x seems a bit low but we've got no idea what kind of macro market we will be in in a few years so hence why I think it's fair to not go above 40x for now.

Overall:

This is a higher risk play, but I don't spend hundreds of hours researching companies for a 20-30% gain. $LMND is one of the few companies in the market today that I think has some very substantial upside. I don't know any other small cap company with such control over their costs and growth and such good unit economics. In terms of unit economics it reminds me of a $NU, but in terms of disruption to traditional sectors it reminds of a $HIMS in healthcare or a $NFLX in streaming. I've parked a lot of my money in $LMND and I strongly believe it'll work out very well.

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