HIPO - Hippo Holdings: A Questionable Work In Progress

Summary

• For now, I see little reason to be optimistic about Hippo Holdings Inc.
• Hippo Holdings continues to take huge losses as revenue modestly increases.
• Its business model of combining AI and data to empower homeowner to essentially customize their insurance has yet to be proven to be profitably sustainable.
• It'll take a year or more before we see if Hippo Holdings Inc. is able to increase revenue while slashing rising losses.

Hippo Holdings Inc. ( HIPO ) is a home insurance company that differentiates itself from its competitors by combining tech, AI, and insurance to provide what is basically customized coverage for homeowners.

Since mid-February 2021 its share price has been crushed, plunging from approximately $375 per share on February 15, 2021, to a 52-week low of $12.76 per share on November 22, 2022.

Even though Hippo Holdings has increased its revenue over the last year, its losses continue to mount, generating questions concerning the viability of its business model.

I understand that companies that combine data and AI in order to improve results are attractive to many investors, but far more of these will fail than succeed in the years ahead, and there's no guarantee that HIPO will execute on its strategy even with its embracing of AI and data to produce customized policies for its homeowner customer base.

In this article, we'll look at some of its recent numbers, its overall business model, and how things look for over the next couple of years.

Some of the numbers

Revenue in the third quarter was $30.7 million, up 44 percent from the $21.3 million in revenue generated in the third quarter of 2021. Revenue in the first nine months of 2022 was $83.9 million, up from the $59.1 million in revenue generated in the first nine months of 2021.

Total expenses in the reporting period were $157.9 million, an increase of approximately $106 million year-over-year.

Adjusted EBITDA in the third quarter was a loss of $54.8 million. For full-year 2022 adjusted EBITDA is projected to produce a loss in the range of $197 million to $203 million. Management said it expects to reach adjusted EBITDA by the latter part of 2024.

Net loss in the quarter was $129.2 million, or ($5.66) per share.

Cash and cash equivalents at the end of the quarter were $346.5 million, significantly down from the cash and cash equivalents of $775.6 million at the end of calendar 2021.

Understanding Hippo's business model

As mentioned above, Hippo Holdings Inc. combines data and AI to design customized policies for homeowners it's working with; this is brought down to the neighborhood level.

The company has its agents get together with its customers in order to design the types of policies that meet the requirements of the homeowners.

How I see the challenge of the company is in essentially having a business model that is one of mass-customization, a difficult business model to execute on.

Understanding the accelerating improvement in AI and data gathering, I don't have a problem believing mass-customization of insurance policies is achievable, but do question whether or not HIPO will be able to execute on its business model and strategy over the next couple of years, in light of the enormous losses it continues to take.

While expectations are revenue is probably going to continue to increase in the quarters ahead, it remains to be seen whether or not the company will be able to significantly cut back on expenses and costs in order to be adjusted EBITDA positive within a couple of years.

Share price and entry point

With the extraordinary collapse of its share price, the question now becomes whether or not the current share price represents a good entry point, or if it has the potential to fall a lot further from the $14.00 per share it's now trading at.

Over the last year or so, HIPO has started to improve on its underwriting and pricing, and that has helped improve its dismal loss ratio. That, along with the strong retention rate of the company represents some hope that the company has started to turn things around on a sustainable basis.

As mentioned earlier in the article, I understand how HIPO, with its AI and data focus, can be viewed as a potential disruptor in the home insurance sector, and if it's able to execute on its strategy, some day it may become that by taking significant market share in the homeowner insurance segment. But that day isn't now, and until it improves on and proves it can execute its strategy, it remains a risky stock to take a position in.

I have no doubt omnichannel, data driven companies like HIPO that embrace AI as a key part of their business will be the future of the insurance industry, but we're still in the early stages of adoption, and there's no guarantee that HIPO will be among the winners in this space.

HIPO has seemed to find a bottom at around $13.00 per share and could build off that if the company shows improvement in the near term. If it doesn't, I think it's going to test its lows and struggle to find support even at current low share price levels.

Conclusion

Hippo Holdings Inc. is offering a relatively new business model in the home insurance sector, and consumers willing to adopt the model, so far, tend to renew their policies at a high percentage rate.

A customized homeowners insurance business is attractive in that the winners in this space, if they can successfully and profitably win market share, are likely to generate solid returns to shareholders. The reason why is I think it's going to be hard to compete in this sector with those that successfully pull off mass-customization in homeowner insurance.

There's no doubt that over the long term HIPO could be one of them, but it has to start turning around in the near term if it wants to be among the market leaders in the long term.

Hippo Holdings' current entry point is attractive if the company can execute on its guidance and become adjusted EBITDA positive by the latter part of 2024. If it does so, its share price is going to take off and make a lot of shareholders happy.

On the other hand, if it falters, the share price is going to come under further downward pressure, bringing a lot of shareholders under water.

With current visibility, HIPO could go either way, so while risk/reward is a lot more attractive than a year ago, it's probably best to position size wisely and take a small position if interested in Hippo Holdings Inc.

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