The stock market has soared higher in 2024, with the S&P 500 index up 21%. Against this backdrop, Root Inc.(NASDAQ: ROOT) has emerged as a breakout stock. This company isn’t just riding the wave of growth — it’s making waves of its own, with the stock up more than 600% since the beginning of the year.
Investors were pleasantly surprised when the company announced its first profitable quarter since going public, something few anticipated. If you’re thinking of investing in this innovative growth stock today, consider the following.
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Root is a tech-driven automotive insurance company that has gone on an absolute tear. The small company started the year with a bang when it posted better-than-expected revenue and earnings per share measures during its February earnings call. The stock went from $9 before the earnings report to nearly $84 in the weeks that followed.
The company stated that its path to profitability was becoming more visible, which kicked off the stock’s sharp rally. Now, investors are beginning to see that vision become a reality.
Root shocked investors when it announced its third-quarter results on Oct. 30. The company posted net income of $22.8 million, or earnings per share (EPS) of $1.35, well above analysts’ forecasts of a loss per share of $0.98.
In the third quarter, Root’s net premiums earned were $279 million, representing growth of 180% from one year ago. Through the first three quarters of 2024, Root’s premiums earned are $771 million, a 244% increase from last year.
ROOT Revenue (Quarterly) Chart
When it comes to up-and-coming insurance companies, rapid growth tends to come at the cost of rising claims costs and expenses. However, this hasn’t been the case with Root this year. The company has experienced stellar revenue growth and is managing expenses and keeping claims costs in check.
At the core of Root’s business is technology and data science. The company leverages driver behavior collected through its app, including speed, mileage driven, braking time, and other information. From there, it can use that data to price its policies. Chief Executive Officer Alex Timm told investors: “We’re constantly iterating on and innovating on what we believe to be one of the fastest paces in the industry.”
One crucial measure for insurers is the combined ratio, which is the ratio of claims costs plus expenses divided by premiums earned. A measure below 100% means an insurer is profitably underwriting policies, and the lower the ratio, the more profitable it is.
Root’s combined ratio was a stellar 91.1% in the third quarter. This not only rivals Progressive, one of the top auto insurers out there, but it was a vast improvement from one year ago when its quarterly combined ratio was 143%. Through the first three quarters of this year, Root’s combined ratio is 98.3%.
Image source: Getty Images.
Root posted an excellent quarterly earnings report and has beaten analysts’ estimates several quarters in a row. As a prospective investor, I find that growth encouraging, but I want to see if Root’s stellar underwriting and policy growth can continue across different pricing environments.
Last year, Root struggled alongside the entire property and casualty (P&C) industry, which had a combined loss of $24 billion in 2023. Things have improved across the industry; in 2024, P&C insurers have made a $3.8 billion underwriting gain, which has undoubtedly been a tailwind for insurers like Root.
Investors who buy the stock should be aware of its high volatility. Beta measures a stock’s risk relative to the market (with the S&P 500 as a commonly used benchmark). Stocks with a beta of less than 1 are considered less volatile than the market, while a higher beta indicates a more volatile stock. Root’s beta is 3.5, meaning it is 250% more volatile than the S&P 500.
Most investors may want to avoid this highly volatile stock and should consider investing in stable, established companies with long track records of success, like Progressive or Chubb. However, investors with a high risk tolerance and looking for innovative disruptors may see Root’s substantial progress as a green light to buy today.
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