Lemonade Just Soared After Earnings -- Could It Reach $100 per Share Within the Next Year?

Key Points

• Lemonade reported excellent second-quarter earnings that handily beat expectations.

• Not only is growth accelerating, but Lemonade's loss ratio continues to improve.

• If management can keep executing on the growth strategy, a $100 price tag isn't out of the question.

• 10 stocks we like better than Lemonade ›

Lemonade (NYSE: LMND) recently popped by about 25% after reporting its second-quarter results. The insurance disruptor reported better-than-expected revenue and earnings, raised its guidance, and is doing a great job of becoming more profitable. It is doing an excellent job of underwriting, and to put it mildly, the relatively new car insurance product is gaining serious traction.

However, with the stock close to a multiyear high, could Lemonade keep climbing? Here's a rundown of how the business is doing and why I think there's a realistic possibility the stock could double to $100 in the not-too-distant future.

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Image source: Getty Images.

Lemonade's excellent growth

A glance at Lemonade's second-quarter results shows why the stock jumped higher. In-force premium increased by 29% year over year to $1.08 billion and represented the seventh consecutive quarter of accelerating growth. The insurance company now has nearly 2.7 million customers, 24% more than a year ago.

Profitability is clearly moving in the right direction. Lemonade produced a $6 million positive operating cash flow compared with a $12 million loss a year ago. Both revenue and earnings per share came in better than analysts had expected, and gross profit more than doubled on a year-over-year basis.

The company's most exciting future growth vertical (Lemonade Car) is showing impressive progress, with in-force premium up by 12% sequentially and a 13-percentage-point improvement in loss ratio compared with a year ago. Plus, Lemonade's European business has emerged as a high-potential growth engine, with in-force premium roughly tripling year over year.

Starting to look like a great insurance company

My biggest complaint about Lemonade throughout most of its publicly traded history had been that the company wasn't doing a great job of underwriting. Loss ratios weren't anywhere near management's stated 75% target for a long time, and it seemed that every time a natural disaster happened, it completely derailed any progress that had been made.

However, over the past two years, the company has made tremendous progress in this area. Of course, there is some seasonality that is to be expected in the insurance business (certain disasters tend to happen in certain seasons), but on a trailing-12-month basis, the trend is clear. In fact, over the past four quarters, Lemonade's gross loss ratio is significantly below where management hoped to get it.

Data source: Lemonade.

Could Lemonade stock reach $100?

As of this writing, Lemonade trades for right around $50 per share, which is just below a three-year high. The last time the stock had a price tag this high was in late 2021 when interest rates were still at near-zero levels.

To be perfectly clear, even though Lemonade is well below its all-time high (which was about $188 in early 2021), it is a much stronger business today. And the recent gains are well deserved.

For Lemonade to reach $100 per share implies a market cap of about $7.3 billion. While I don't necessarily think it will happen right away, if Lemonade can keep its growth going, produce strong underwriting numbers (even when natural disasters happen), and keep overall profitability heading in the right direction, it's certainly possible. After all, the market opportunity is simply massive (especially in auto insurance), and strong momentum could lead to strong stock performance.

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Matt Frankel has positions in Lemonade. The Motley Fool has positions in and recommends Lemonade. The Motley Fool has a disclosure policy.