Apple is a phenomenal company by just about every measure. But with a market capitalization around $2 trillion, it’s massive size makes it less appealing to investors who are looking to put their money into companies with long runways for growth.
If that’s the sort of stock you’re interested in adding to your portfolio, you may want to consider Lemonade (NYSE:LMND), a small, tech-forward insurance provider that has some of the same characteristics that made the iPhone maker an incredible investment.
“The people who are crazy enough to think they can change the world are the ones who do.” — Steve Jobs, Apple co-founder and former CEO
Innovation has always been at the core of Apple’s DNA, and it’s central to Lemonade’s, too. Co-founders Daniel Schreiber and Shai Wininger have set about to upend the centuries-old insurance business model with an operation built from scratch on the foundation of a “digital substrate” rather than a human-powered one. As Schreiber explained during the most recent earnings call: “We set out to replace brokers and bureaucracy with bots and machine learning, aiming for zero paperwork and instant everything.”
That innovative approach has distinct advantages. The company reports that the average time to buy a policy is less than two minutes, approximately a third of all claims are paid instantly, and that a first-time insurance buyer can save about 50% on policies with its products. Customers interface with chatbots for many routine customer service issues and use their phones to capture video information on claims. Its artificial intelligence engines help to make the customer experience even better over time and have helped cut its gross loss ratio (the ratio of claims paid out to premiums collected) in half over the last two years.
As a result of its technology, it can serve more than 2,000 customers per employee. By contrast, says Schreiber, the “most efficient insurance companies in America have about a ratio of 400 customers to 1 employee.”
It’s got customers love
“I want the customer to be happy. We work for them.” — Tim Cook, Apple CEO
Apple is consistently rated as one of the most loved brands, and with good reason. Not only are its products great, but when things go wrong, it’s there to make things right. Lemonade has been winning similar customer accolades. Management reports it has a net promoter score (NPS) above 70. NPS is a measure of whether customers would recommend the company to others, and a score over 70 is considered world-class. Its apps also receive great ratings from users. On the two app stores’ respective 5-star systems, Lemonade’s Android app has a 4.6 rating, and Apple’s users score the iOS app a 4.9.
But Lemonade has another key attribute that customers love. It’s the fact that it’s a public benefit corporation (PBC), meaning it is legally obliged to consider the impact of its decisions on all stakeholders. As a PBC, it’s developed a robust giveback program that donates the money that’s left over after the company takes a flat fee of 25% for business operations and pays out its claims for the year. Customers can pick which nonprofit they want to route their share of those funds to; so far in 2020, it has paid out over $1.1 million to these causes.
It’s playing in a massive market
“We all had cellphones. We just hated them, they were so awful to use. … It’s a huge market. I mean a billion phones get shipped every year. … Let’s make a great phone that we fall in love with.” — Steve Jobs
Just like the early cellphones, I can’t imagine that many people love their insurance company. And just as Apple did when it revolutionized smartphones, Lemonade is attempting to capitalize on the massive opportunity that exists because of our dislike of the status quo. The company estimates that more than $5 trillion is paid every year in property, casualty, and life insurance premiums around the world, and with its focus on becoming the “world’s most loved insurance company,” it should have an edge on winning customers away from the incumbents.
Today, Lemonade only offers renters, pet, and home insurance, but it’s already achieving impressive growth rates. As of its most recent quarter, it boasts 814,000 customers, up 84% year over year. Not only is it winning new customers, but existing ones are also upgrading their coverage: In the second quarter, the average premium paid per customer rose 17% year over year. These two factors combined to give the company a revenue gain of 117%.
For 2020, It expects to collect $190 million to $195 million in premiums, a tiny percentage of what’s possible.
The bottom line for investors
With traits similar to those that have made Apple successful, this tiny business is disrupting a massive and established industry. Even though it’s still losing money, its easy-to-use customer platform, lower-cost products, and charitable focus give this tech operator an edge over the incumbents.
Lemonade may never become a trillion-dollar market cap behemoth, but it doesn’t have to for investors to achieve great returns from its stock. If you’re a growth investor turned off by Apple’s size, you should consider buying a piece of this $2.8 billion small-cap tech upstart instead.