Funny, earlier in the week I was watching LMND go past 180 on no news and thinking “how have they not raised equity yet?” and, bingo, 24 hours later, here’s the raise. They couldn’t have timed it better.
For those who remember the Insurance Hare piece, this is what the Hare does. The first priority is keeping the cost of capital cheap to paper over any costly execution failures.
On that score, Lemonade has succeeded wildly. This week’s offering was at nearly 6X the price of the IPO raise six months ago. Think about that for a minute: if the stock were flat since the IPO, they would have had to issue over 17M shares instead of 3M to raise $500M.
Thus, the Hare strategy was worth 14M free shares! On a starting base of ~57M, they reduced dilution from 30% to 5%! They have literally created more value through capital management than anything they have done operating their business! They are the Hare Extraordinaire!
What a Fool Believes
So what exactly caused LMND to double in a month? After already going up 50% the month prior! And doubling on the IPO!
Apparently, a big catalyst was positive articles on fool.com. Yes, that’s the site more commonly known as The Motley Fool. The one that used to make stocks double back in the 90s when you would read their stock tips on AOL.
Now, I haven’t seen these articles (apparently, they’re behind a paywall), but I suspect I can guess what they say. To be candid, I had no idea Motley Fool could still moved stocks. I thought that was something that died twenty years ago.
This is a site that’s literally older (launched in 94) than the millennials who are buying Lemonade’s stock (and renter’s policies). R/wallstreetbets it’s not. I would have guessed if you told a 24 year old to go to fool.com for stock tips, they would have made a Boomer joke about you!
Chain of Fools
Yet, they’ve managed to pop the stock 20% in a day twice. That has all the marks of a short squeeze. Short squeezes are key to being a Hare. Speaking of fools, Hares need foolish shorts to create excessive valuations.
Valuations don’t get out of hand without forced buying. Longs don’t have to buy. Shorts getting carried out on a stretcher are forced to cover.
The fool shorts don’t realize that being right on the fundamentals doesn’t matter unless you can prevent being squeezed before you’re proven right. It’s basic game theory and they fail to understand it over (Amazon) and over (Tesla) and over (Zoom).
Lemonade short interest is certainly on the high side. I would speculate that the writers at Motley Fool are aware of this positioning and know that coming out with something positive could create a squeeze.
This is certainly the type of move we saw back in the 90s and have seen recently at Barstool and on Reddit. Again, without seeing the exact stories I’m only speculating, but clearly websites want hits and squeezing a popular short is a great way to drive traffic.
Everybody Plays the Fool, Sometimes
This is all like a really cheesy movie script. I can imagine the screenwriters hashing it out…
“OK, so we need a story for why the stock doubles for no reason.”
“How about some no name web site touts it?”
“No, wait. How about some used to be cool site from the 90s touts it.”
“Great idea, what should we call it? Fool.com. Has that 90s cred and describes the people who read it.”
This couldn’t be more ironic if you tried. It’s like three or four layers deep of irony. Everything was so predictable.
1) Hot IPO gets heavily shorted.
2) “Smart” money gets short.
3) “Smart” money loses all their money (and smarts) on the squeeze.
4) Lucky longs laugh all the way to the bank…
5) Except the ones who forget to sell before the music eventually stops because they actually believe the hype is real and not a game.
There are plenty of fools to go around. The only true winner here is Lemonade. They have played all the fools brilliantly. Finding 14M shares worth of free money is a magic trick that only the best can do. Kudos to them.
Note, I have gotten this far and yet to write one word about whether the company is headed the right direction or not or whether the business model can ever make money. If it’s not obvious by now, that is – as the kids now say – a feature, not a bug.
The Hare isn’t preoccupied with getting the business model right. It is preoccupied with raising capital for free because that buys time to figure out how to make money.
Why Do Fools Fall in Love?
So what happens next? Obviously, the much speculated acquisition by Lemonade. Now that the high valuation has been “validated” by raising capital at these levels, can they convince a Time Warner that their currency is legit?
I suspect they can. The biggest issue will likely be that they need to find a seller who will take an all stock deal. There obviously isn’t the ability to do a cash deal.
And hey, nothing stops a seller from dumping the stock post lockup. If the LMND bid is 20% above another offer, then you’re probably willing to take that execution risk.
Obviously, the big benefit to Lemonade is they get cash flow to fund their growth and hopefully management expertise to help them produce more profitable growth.
Won’t Get Fooled Again
So does this mean Lemonade has successfully demonstrated that the Hare has won the race? No. Even if they buy a “real” company and can show profits? No.
They still have to prove they can generate organic business that is profitable and sticks around. They have to show they can succeed in businesses beyond renters. They have to show they can keep customers as they get older and their insurance needs change.
In other words, at some point, the Hare has to prove it can do all the things the shorts say it can’t do. Amazon eventually made profits and created Prime (and AWS). Tesla eventually figured out how to build cars somewhat on time and sort of on budget. Remember, being the Hare buys you time. It is not, in and of itself, a solution.
Those fooled so far may have the last laugh. Or they may keep getting fooled. It is too soon to tell…and that is Lemonade’s greatest asset. They have bought themselves time before the true fool is revealed.
Like any cheesy movie script, the best way to cover up bad writing is with a good soundtrack. In case anyone has songs stuck in their head…