the Lemonade ($LMND) memo
Quick deep dive into Lemonade
Hey there, it’s Justin here
Back once again after a hiatus. A year ago, I enrolled in an MBA program at Nanyang Business School. Few of my absolute favorite modules were Finance and Economics and Markets.
Just thought I’d like to pen down this short memos to track some of my equity investments and what made me open a position for it.
Disclaimer, this ain’t financial advice. Perhaps it could serve as a starting point for your own research.
The $LMND memo
Investment Thesis
Founders are proven veterans. CEO Daniel successfully founded a company that invented and commercialized Powermat charging. Co-founder Shai was the co-founder of Fiverr, the freelance marketplace. Both Israelis with a track record of getting things done. Initial seed investors invested because of these 2 persons. Initial founding team joined on board because of these 2 folks. There’s something about this duo that people respect and are willing to leave their comfort zone and well-paying jobs for.
Insurance industry has a very large Total Addressable Market (TAM), permeates many sectors – home, car, health, pets. Anything that you can own can be insured.
LMND currently offers the following products possibly giving it almost a half-trillion TAM opportunity collectively.
1) renter’s insurance with $8 billion TAM
2) homeowners insurance with $144 billion TAM
3) auto insurance with $344 billion TAM
4) pet insurance with $3 billion TAM
5) term life insurance à $25 billion TAM
LMND underwrites the insurance policies (except term life insurance) themselves (they are not an insurance brokerage), they are a legit insurance company holding licenses in various US states. They reduce their own risk of payouts through “reinsurance” where they transfer some risk of large claim payouts to a reinsurer
LMND is a tech company first and foremost that does insurance. Leveraging AI and tech is natural for the company. It harnesses their expertise in this area to build great customer experience such as quick onboarding, fast claims processing and user-friendly interface.
Read the book “The making of Lemonade” by Ty Sagalow (one of the founding team members), it outlines how LMND is different from incumbent insurance companies. The value proposition of LMND is that they are an insurance company that is based on behavioral economics and AI. It leverages behavioral economics principles to simplify decision making, emphasize low premiums and transparent pricing to reduce the perceived “loss” of paying for insurance. Its “Giveback” program, where unclaimed premiums (only if the total insured group does well for the year, ie. After all costs are covered) are donated to charities chosen by customers, reframes insurance as a socially beneficial purchase rather than a sunk cost.
TLDR; LMND has great founders at the helm with a proven track record. They are in a business where the TAM is huge, thus even getting a small market share of it (eg. 1-2% of the TAM) could result in billions of revenues. Furthermore, being tech and AI first, they can harness its full potential to keep operating costs in check as revenue scales over time. It’s commitment from the start to create a company that is aligned with its customers’ goals is something that differentiates them from incumbents and relates them to the younger generation. In fact, they are already dominant in niche types of insurance like renters, homeowners and pets. Massive growth will come once they are able to break into more mainstream, larger TAM types of insurance like auto insurance, health and life insurance.
Valuation - back of napkin style
Valuation based on simplified DCF, below are my assumptions for simplicity
- Revenue growth rate assumed tapers down to a stable average 20% growth rate over next 10 years (till 2035) and 6% at terminal value after 10 years (beyond 2035)
- Operating margins assumed taper down from 138% to 40% by 2035
- Depreciation assumed to be constant at $20 million annually perpetual
- Taxes taken as 21%
- Capex amount increasing from $9 million to $20 million terminally.
- WACC (used as discount rate) is 17.5%
- Current total shares outstanding is approximately 73 million
Based on these assumptions, LMND’s fair value share price is approximately $55, with a 30% upside from current prices ($42 as of 18 July 2025). See below for calculations
Risks
In terms of price to sales ratio, LMND’s is quite high, being close to 6 times with a market cap of $3 billion and revenue of only $500 million. The team needs to be flawless in execution otherwise this ratio may have to decrease.
Given a more conservative price to sales ratio of 3x, LMND should only be trading in the $20-$30 price range basis current revenues.
Key man risk, what if Daniel and Shai do leave the company? Highly doubt it now, so it’s more of an eventual scenario couple years down the road.
Claims payout ratio should be kept in check below 75%, it’s a key driver for the company to become profitable.
Are there any other risks? Happy to hear thoughts on this.
If you’ve enjoyed this, feel free to subscribe or leave a comment. Either one is greatly appreciated
Cheers,
Justin