Root Insurance (ROOT) is not your typical car insurance company – they are disrupting the automotive insurance industry by using telematics (gathering data through machine learning and monitoring car location using GPS). They have a simple to use app that users download to track car driving behavior for a few weeks and then either approves or rejects the driver as an insurance customer.
They’re also disruptive in that they only analyze a driver’s driving behavior to offer an insurance quote or approve the driver as a customer- not like other car insurances companies that does this based on credit score, income, etc. Therefore, they are trying to choose the safest of drivers in order to consistently result in the lowest loss ratio ( total incurred losses in relation to the total collected insurance premiums). What’s great about this is as they continue to gather data through machine learning, they’re able to optimize which drivers they approve and reject which will lower their loss ratio (in theory).
Another key aspect of their business is ROOT Enterprise. This is their technology based telematics division in which they are able to gather data through machine learning (all movements in a moving vehicle is collected as data). The next step up for them is to sell this data to other car insurance companies (which they intend to) or they could also sell this data to fleet management companies such as Hertz). This would be more of a corporate B2B business model whereas their insurance business is B2C.
Insurance Availability by State (current 31 States)
Fundamental Analysis:
-ROOT was founded in 2015 and IPO’d in Oct 2020 at $27/share or $6.7B Market Cap. As of today, their share price is -82% from their IPO price.
– There are many institutional investors who purchased $ROOT at >11/share price and I like ROOT because they have high insider and high institutional ownership. From the breakdown below, 26% of share are held by insiders, 55% by institutions, and 75% of float held by institutions. This stock has always been and still has a high short interest % (27-34%) via Marketwatch or HighShortInterest. This is a very similar setup to other WSB companies that have reversed/bounced back very well due to high institutional/insider ownership + high short interest (i.e. $GME).
Although Root burns about $330M/yr in cash based on operational/marketing expenses (which is a lot), it is because they are trying to gain market share in a traditional car insurance industry to compete against the State Farms, Geico, Progressive, etc. and it is a labyrinth in trying to get approved State by State. It is exactly what Elon Musk mentioned about Tesla and now he’s trying to create his own Tesla car insurance for next year. Electric cars typically have a higher amount of safety sensors that should lower insurance premiums cost, but it isn’t taking place right now. Root is currently approved in 31 States and working on approvals for all States which will increase their revenue/improve profitability/scalability.
What’s more important and what acquirers/investors look into is their Book Value and Cash- ROOT has approximately $1B in cash held which is favorable as we don’t expect them to do an offering anytime soon. Their cash/share value is $3.76 and their price/cash ratio is 1.32 which is an extremely great value in investing in this company on a cash basis (& also for Book Value). If you look at other insuretech companies such as Lemonade and others – you can see why ROOT makes it a great value to invest. i.e. Lemonade has a 3.51 Price/Book Value and 3.67 Price/Cash value.
| Current Market Cap: | $1.28 B | Share Outstanding: | 249M |
|---|---|---|---|
| Annual Sales: | $260M | Shares Float: | 97M |
| Net Income per Year: | – $496.7M | Short Float: | 27-34% |
| Book Value/Share: | 3.06 | ||
| Cash/Share: | 3.76 | ||
| Price/Book Value: | 1.62 | ||
| Price/Cash: | 1.32 | ||
| EPS: | -1.98 |
Major Institutions invested in ROOT at >11/share
The most significant upside to their business is their $CVNA/Carvana shareholder, partnership, and most likely, future acquisition. Carvana has invested $126M into ROOT convertible at $9.00/share into approximately 14M Class A shares- this is approximately 5% ownership of ROOT. This agreement also includes a 5 year partnership on paper. In addition, ROOT issued to Carvana eight tranches of Warrants, comprised of three tranches of “short-term Warrants” and five tranches of “long-term Warrants.” If the Warrants are fully exercised by Carvana for cash, Carvana will have the opportunity to purchase approximately 129 million shares of Class A Common Stock, representing 29.9% of the issued outstanding shares at exercise prices of $10.00 to $12.00 and the long-term Warrants have exercise prices of $10.00 to $30.00.
When ROOT issued warrants to Carvana to purchase up to 30% of the company at majority $10-$30/share, it shows that an acquisition is very much possible for ROOT by Carvana.
Technical Analysis:
ROOT is currently in a continuous descending wedge and a breakout is imminent at/below $6/share. The yearly RSI (relative strength index) is at 30 which shows that it’s current price point is extremely low. If ROOT is able to breakout above $6, then I could see a very short term price target of $10-11/share based only on technicals. ROOT is again a high short interest setup (27-34%) and could gain significant volume and momentum in a few days. i.e. The average volume/day of shared traded is roughly 5M shares. On 8/30, 55M shares (11X) were traded that popped the stock +30% in one trading day.
SUMMARY:
ROOT is a current undervalued value short and long term play with a price target $11-15/share. They have a disruptive and fundamental business tackling a traditional car insurance industry and they have the technology and means to do so. Moving forward, their Carvana partnership will be key to growth and possibly future acquisition.
This article was written by u/Independent-One-3760.
