- Lemonade is an egregious stock promotion disguised as a social impact company – the company is making a complete farce of the ESG investment movement. Today’s press release establishes that growth is falling off a cliff – based on the ~1MM active customer disclosure, the company had one of its weakest net add quarters since inception. There is no special technology, the company’s philanthropic efforts are largely hot air, the foundation appears to have been a gimmick to draw ESG fund flows, and even under the most extreme optimistic conditions, the valuation is totally divorced from reality
- It would be one thing if Lemonade was honest about being in the business of stock price maximization – but instead the company legally structured itself as a public benefit corp and its entire marketing pitch is that it is a morally righteous and charitable company…the reality is that the company is completely misrepresenting its business model to not only investors but also to customers – and in the most heinous way imaginable by disguising itself as a quasi-charity
- Lemonade already loses a staggering amount of money (the company is only 5 years old yet cumulative losses are almost $300 million)…so if the company actually delivered on its philanthropic promises, we imagine the losses would be so staggering that the stock would become uninvestible
- Lemonade publicly claims it gives “up to 40%” of vaguely described “unpaid money” to charity – the reality is that it gives a meager ~$1 per customer per year to charities (works out to about ~3% of “unpaid money”)…this is despite a) claiming to be a quasi-for profit social impact company, b) sporting a $7 billion market cap, and c) having raised hundreds of millions from VCs and the public markets that are readily available and on hand
- Lemonade tried to IPO in 2019 and failed – after this IPO failure, in February 2020 the company created and allotted 500,000 shares to a 501(c)(4) entity called “Lemonade Foundation”. We believe this move was purely to amp up its appeal to ESG focused investors. If these ESG investors are serious about “ESG” principles, they should be bewildered that now almost one year after the “foundation” was founded – and after insiders have also circumvented standard IPO lockup rules to dump stock – the company has yet to provide any mission statement or even a website for the Foundation
- Any ESG fund that wants to be taken seriously should not only exclude LMND from its investment universe, but should also rebuke Lemonade management for so blatantly abusing ESG principles for stock promotion purposes
- Lemonade’s claims of being a disruptive technology company are also bogus – the company quietly reinsured its entire book of business at the time of its IPO – if Lemonade actually had any legitimate underwriting technology, it would not have outsourced all risk to reinsurance companies. When you cut through the hype, Lemonade is basically a “lead gen” service, losing astronomical sums of money to find new customers and then selling that customer flow to reinsurers. Lemonade ultimately lives and dies at the whim of conservative and old-line reinsurers
- Company insiders have not been shy about dumping into the pump – the company has still not bothered to put up a website for its philanthropic “foundation” (a key piece of its “public benefit corporation” marketing gimmick) yet insiders found plenty of time to dump shares through a shady front-end loaded lockup deal negotiated into its original IPO
- The final lockup has now expired and going into 2021, short term call option players are sitting on large taxable gains that will force liquidations in 1Q21 – we see a rush for the exits in early 2021 with Lemonade falling 90%+ in short order
The author is short shares of LMND (“the issuer”). Use of this report is limited by the Terms of Use on https://friendlybearresearch.com/terms-of-service/. You should carefully review the Terms of Service prior to reading this report. All information for this article was derived from publicly available information. Investors are encouraged to conduct their own due diligence into these factors. This article represents the opinion of the author as of the date of this article. The information set forth in this article does not constitute a recommendation to buy or sell any security. This article contains certain “forward-looking statements,” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential,” “outlook,” “forecast,” “plan” and other similar terms. All are subject to various factors, any or all of which could cause actual events to differ materially from projected events. This article is based upon information reasonably available to the author and obtained from sources the author believes to be reliable; however, such information and sources cannot be guaranteed as to their accuracy or completeness. This article reflects the author’s opinion at the time of publication. The author makes no representation as to the accuracy or completeness of the information set forth in this article and undertakes no duty to update its contents. The author may also cover his/her short position at any point in time without providing notice. The author may also transact in equity options of the issuer at any point in time without providing notice. The author encourages all readers to do their own due diligence.
ESG and social impact investing are all the rage. Some estimate that over half of all capital allocated in the world will follow some form of ESG guideline within the next few years. That is what makes Lemonade such an important story. Some politicians have expressed distrust of ESG frameworks and certain influential Wall Street types have aggressively pushed back, espousing the benefits of ESG frameworks. Lemonade is one of the many grand experiments in ESG – in both marketing tactics and in stock promotion tactics (the company even set itself up as a public benefit corporation, aka a hybrid for-profit / non-profit).
In our view, if the Lemonade experiment is successful, it will cast immense doubt on the ESG investing movement and give more credibility to opponents of ESG. This is because Lemonade is one of the most obvious farces in stock market history. And money managers who believe in ESG and who have any desire to appear credible should be speaking out about companies such as Lemonade that are so obviously and blatantly abusing the ESG framework purely for self-enrichment purposes.
We should note that as short sellers we think ESG investing has a lot of merit. We certainly would prefer a world where companies that bribe corrupt foreign governments, employ slave labor, require their employees to utilize Gatorade bottles for bathroom breaks, and dump toxic waste in the waters of Lake Michigan are held accountable. In fact, in an ideal world, ESG investing wouldn’t be necessary because companies may actually be held accountable for ruining the world around them.
So we are not writing this piece to take shots at ESG investing broadly. At its heart ESG investing clearly has good intentions. Unfortunately, in some cases, financial charlatans and hucksters have hijacked the movement for self-enrichment. Part of the issue is that the lines that define a strong “ESG investment” remain unclear. For example, companies that lobby against the use of slave labor score well in many ESG rankings. It is even more telling that one of the “Founding Fathers” of ESG investing – who the New York Times referred to as a “Buddhist Monk” – was arrested for bribing his child’s way into college.
In our view, Lemonade is a despicable company that is taking advantage of people’s desire to do the right thing. We think it is bringing disgrace upon the ESG movement. If you are reading this story and you have been following the ESG investing movement, we think you too will want to see the company fail spectacularly whether you are a fan or foe of ESG. This is because we think Lemonade is blatantly abusing the ESG investing framework not because it wants to make the world a better place, but purely to enrich insiders and venture capitalists who are playing to an audience that increasingly wants to see companies behave responsibly and reflect their values. And as a result, Lemonade is siphoning off funding that should go to companies that actually make a positive difference in society.
Unfortunately for Lemonade, we think the ESG stock promotion will unravel and leave investors holding the bag. Lemonade has an indefensible valuation. That alone is not the reason the company will implode. There are many high flying companies in the market that are “ESG”-oriented with stratospheric valuations – e.g. companies in electric vehicles or in the clean tech arena. The difference is that those companies – at least in principle – are undertaking business operations that may theoretically improve the world. Lemonade on the other hand a plain vanilla insurance company with no secret sauce that lives and dies based on reinsurance contracts. There is no big addressable market story. Insiders utilized an extremely shady lockup agreement so that they could start dumping shares immediately after the IPO. The company’s charity activities are hot air. The company has not even set up a website for its supposed philanthropic foundation (www.lemonade.org) but insiders are already trigger happy with the sell button. Any other insurer could replicate its piddly charity contributions without denting their margins. And as the Millennial customer base comes to realize that Lemonade insiders are only in it for themselves and not for the “greater good” we think the stock will implode.
For morally conscientious investors sitting on massive Lemonade gains (gains that will entail large taxable gains that require stock liquidations in the coming weeks) here is our advice.
Stop enabling egregious Wall Street scams and sell your Lemonade shares. Donate your profits to a real charity effort instead of enriching greedy insiders.
Top Reasons Lemonade is a Near Worthless Stock Promote
#1 – Lemonade touts its underwriting technology prowess, but on the day of its IPO reinsured all of its risk, suggesting it has no faith in its own “technology”
Companies such as Metromile have claimed that their specific telematics technology allows them to better underwrite car insurance risk. Lemonade, in an effort to fetch a high valuation, makes similar claims. These claims appear to be bogus based on Lemonade’s own actions ahead of its IPO.
If Lemonade had a better technological mouse trap and could find policies that were lower risk – it would want to hold onto all of that risk. If Lemonade really had discovered a new technology that allowed it to keep its costs low, it would never want to share the spoils of that technology with reinsurers.
Yet on the day of its IPO, Lemonade restructured its entire business and essentially shifted all of its risk to reinsurance. So Lemonade partners with well known reinsurers such as Lloyds. Essentially, the restructured business has Lemonade in almost a lead gen capacity – it finds leads, signs up an insurance policy, and then keeps a small fee for itself. The problem with this model is two-fold. First, it is clear that if Lemonade actually had some secret sauce proprietary technology, it would want to do better than just hold onto a small fee – it would want to hold onto economics. Second, if Lemonade in its capacity as effectively a broker ends up sending too many bad policies to the reinsurers, the reinsurers can just cut Lemonade off. If that happened, we see no credible investment case for Lemonade and expect the stock will implode.
So ultimately, Lemonade investors are actually buying a low quality lead gen business masquerading as a disruptive fintech insurer.
#2 – Charitable Contributions are Next to Nothing
The key element of the Lemonade ESG stock promotion is that the company claims to donate “excess profits” to charity. The company makes absurd claims – that we think could even run afoul of insurance regulations – regarding its charity efforts, claiming that its commitment to donate excess profits to charity will result in its policyholders filing fewer fraudulent claims.
The reality is that Lemonade donates almost nothing to charity and its charity activities have been declining despite the company’s robust top-line growth.
If you run the math, Lemonade donates slightly over $1 per customer per year to charity! Its charity claims are a complete joke. For context, Lemonade collects about $200 a year in premium per customer. So $1 of that premium goes to charity and they call this an ESG stock?
Plenty of companies do charity and you don’t hear about it in the S-1. Plenty of companies do charity but they do not set themselves up as “public benefit corporations”. The NYSE has even claimed that Lemonade is “connecting profit with purpose”. We of course doubt the NYSE’s flattering description of Lemonade had anything to do with courting its backers Softbank and Sequoia for their remaining stream of IPO listing business.
Lemonade claims it will donate “up to 40%” of its unclaimed premiums to charity. The reality is that the company donates next to nothing to charity (the 40% figure is closer to ~3% of unclaimed premiums) and given the company’s willingness to run with staggering losses and its high cash on hand, it does not appear that there is anything that would practically limit Lemonade from donating more money to charity.
Yet for the “low low cost” of $1 per customer per year, Lemonade got itself a nice multi-billion dollar ESG premium valuation.
#3 – 2019 Busted IPO Plans and Shady Front End Loaded Insider Selling Scheme Via Early Lockup Release
Lemonade tried to IPO in 2019 and failed. After this IPO failure, the company created a 501(c)(4) entity called “Lemonade Foundation” in February 2020 to amp up its appeal to ESG focused investors. Despite the foundation being in existence for almost a whole year, Lemonade has not even bothered to provide a website for the foundation, let alone a mission statement or goals for the foundation (more on this in the next section).
While Lemonade does not appear to be particularly good at charity, it does appear to be extremely adept at setting up a stock dumping vehicle. It is customary for insiders to wait 6 months to sell shares after an IPO. But not Lemonade. In its prospectus, it carved out the ability for insiders to sell up to 33% of their locked up holdings immediately, as long as the stock popped at least 33%. This condition has been more than met, and insiders have not been shy about dumping.
#4 – Suspect “Charitable” Foundation
While Lemonade insiders have been quick to dump stock at prices less than half of where the stock currently rests, the company has not been so quick to set up a website for its supposed “Lemonade Foundation”. As part of the ESG narrative, Lemonade created a 501(c)(4) entity called the Lemonade Foundation and made an initial grant of shares to that foundation. It is worth noting that this specific structure is NOT a traditional 501(c)(3) – it is NOT a tax exempt organization, and the corporate structure – 501(c)(4) – was likely chosen because it provides Lemonade with the ability to use the foundation as a front for political lobbying activities and to engage in marketing activities to promote Lemonade products. Nothing prevents Lemonade from using this foundation for political lobbying efforts. Lemonade does not even have to disclose the donors to this entity per the rules around these shadowy financing vehicles that are often the underlying entity behind political action committees or PACs. Presently, the foundation consists of employees that work for Lemonade the public trading vehicle. All of this opens up significant risk of conflicts of interest. All of this also suggests that Lemonade’s ultimate acts of altruism and charity are likely to fall far short of their promotional hype.
But come on guys – can you not at least populate a website before you start dumping your shares?
#5 – Alignment of Interest Claims Are Not Only False, But They Potentially Open Lemonade up to False Claims Allegations from Insurance Regulators
Lemonade presents itself as a “flat fee” capital-light insurer (there is no such thing) but in reality it is heavily reliant on reinsurers – the company quietly restructured its insurance activities immediately ahead of its IPO and will now live and die at the whim of reinsurance companies. This is why Lemonade is heavily restricted in how much it can give to charity – 75% of all money they collect immediately goes to reinsurers, and if they have high incentive to reject claims to keep their reinsurance contracts affordable.
Therefore, if Lemonade wants to remain in the good graces of its reinsurance customers and to maintain current terms, it has a high incentive to deny as many claims as possible.
So while Lemonade is telling Millennials that it has no incentive to deny claims because of its “excess profits to charity” narrative, the reality is that reinsurers will cut Lemonade off – leaving the company essentially worthless – if Lemonade does not keep its underwriting tight and under control. We have also already established that the company donates many multiples less than the “up to 40%” of premiums to charity, which even further dents this alleged alignment claim.
Lemonade discloses a risk of insurance regulators taking issue with some of its marketing claims. We agree and think this is a significant risk for the company. It is trying to present itself as a friendly insurer that will not deny claims when in reality much larger and conservative reinsurance organizations are the ones that will call the shots and can quickly destroy Lemonade’s business with the stroke of a pen.
#6 – Promoters Paradise
Every imaginable stock promotion outfit has touted Lemonade in recent weeks. Take a trip to Motley Fool, TikTok, YouTube, or Twitter and you will be inundated with stock promotion outfits touting Lemonade. Never mind that these outfits have no idea what Lemonade actually does (they actually view it as a technology company and appear to know absolutely nothing about the company’s reinsurance entanglements). Yet chat room message boards are filled with traders who excitedly trade in extremely short duration options on the stock.
#7 – Lemonade is likely the most expensively valued insurer in the history of mankind
With only ~940k customers, Lemonade is a beyond subscale insurer. For comparison, Allstate – a real insurance company that also does charity – in fact, far more charity than Lemonade – trades at about ~1x gross earned premiums (a proxy for revenue in an insurer). Compare this to Lemonade which trades at 48x gross earned premiums.
The stock promoters of course do not want to admit this truth to investors. Even Trupanion, an extremely high flying pet insurer, trades at only 10x revenues despite exhibiting similar growth to Lemonade.
It is also worth remembering that Allstate has a real management team with extensive experience in insurance. Lemonade is run by a former executive from Powermat – a wireless charging pad company. He has zero insurance experience. Its other co-founder was involved with Fiverr – a marketplace for freelance work. Again, no insurance experience.
Alltstate also does substantially more philanthropic work than Lemonade yet does not dedicate all of its marketing materials to promoting this narrative. It would not take much for Alllstate or any other real insurance company to adopt Lemonade marketing tactics to help win over Millennials.
#8 – Lockup and Taxable Hit Coming?
The legions of new retail traders that minted money in Lemonade call options this year owe significant amounts of short term capital gains taxes in a few months. That, in conjunction with a much larger lockup release on 12/29 lead us to conclude that the stock will implode in short order. The stock has been run up due to its tight float and high short interest. With the float now opening, we see this game reversing soon.
Conclusion
Lemonade has no secret sauce. It is a plain vanilla insurance company (primarily selling renters insurance) that reinsurers all of its risk. The only thing proprietary about its business model is that it was backed by Softbank and therefore afforded the opportunity to burn wild amounts of cash at will. The company’s ESG claims are full of hot air and in our view were only designed as part of a broader stock promotion scheme. The lockup is coming off at the same time that investors who made insane sums of money on short term call options in 2020 will have to pay taxes. We see extreme levels of selling and no one with a brain would buy this stock at even half of its current valuation given how out of synch the stock has gotten from fundamentals or reason. Perhaps most importantly, Lemonade is a disgrace to ESG/social impact investing and money managers who want ESG to be viewed with a non-critical lens should strongly consider speaking out against this company. This stock is a signature bubble stock (reminiscent of GPRO) and we expect that it will retrace all of its post-IPO meteoric rise and then some.