Auto insurer Root, Inc. (ROOT - Get Rating), which uses data and artificial intelligence (AI) to determine rates for its customers, made its stock market debut in October last year through an initial public offering of two million shares. ROOT’s IPO has been hailed as the largest IPO in Ohio so far and the largest Insurtech IPO in 2020.

Shares of ROOT began trading at $27, above  its $22 – $25 target range. The company raised $724.40 million through the IPO.

While the stock surged 9.2% during its first trading session to hit an all-time high of $29.48, it thereafter declined on concerns over the company’s weak financials before surging again over the past month. While the stock has declined 36.2% over the past six months, it has advanced 22.7% over the past month, perhaps on the meme stock craze. The stock may have been targeted by the Reddit forum because 28.53% of its float has been sold short.

Here’s what could shape ROOT’s performance in the near term:

Acquisitions and Partnerships

Last month, ROOT partnered with award-winning Insurtech company Safekeep, Inc. to enhance its identification and maximize subrogation opportunities within its claims portfolio. Through this partnership, ROOT should be able to systematically identify recovery opportunities missed in the traditional subrogation processes, benefitting insurance innovators.

On June 15, the company placed its June property catastrophe program with Tremor Panorama. Regarding this partnership, ROOT’s founder and CEO Sean Bourgeois said, “In less than a week (of the partnership), we were able to organize the placement and bring more capacity than was needed, allowing Root to manage its long-term relationships during the process. We were particularly excited that we could bring new markets to the program while delivering competitive pricing subject to their constraints in record time.”

Lawsuits

Several class action lawsuits have been filed against ROOT over the past couple of months. On March 19, a lawsuit alleging violations of securities laws and the release of false and misleading statements in connection with its IPO was filed.

In May, The Schall Law Firm filed a class action lawsuit regarding alleged violations of federal security laws, while Rosen Law Firm and Pomerantz LLP filed respective lawsuits regarding the company’s IPO last year.

Weak Financials

ROOT’s revenues declined 44.7% year-over-year to $64.80 million in its  fiscal first quarter ended March 31. This can be attributed to a nearly 50% decline in net premiums earned to $59.10 million. Its net loss and loss per share came in at $99.60 million and $0.40, respectively, over this period.

Furthermore,  ROOT is bleeding cash from its operations. Its trailing-12-month net operating cash flow stands at $331.90 million. Also, the company’s trailing-12-month gross profit margin and net income margin are negative, indicating inefficient operations.

Trading at a Premium Valuation

ROOT’s forward P/E and EV/EBITDA multiples are negative. And in  terms of forward Price/Sales, ROOT is currently trading at 9.40x, 186.5% higher than the 3.28x industry average. The stock’s respective 5.8 and 6.2 forward Price/Book and EV/Sales ratios compare with  1.18 and 3.18 industry averages.

POWR Ratings Reflect Bleak Prospects

ROOT has an overall F rating, which equates to Strong Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

ROOT has an F grade  for Value and Sentiment, and D for Quality. While the stock’s premium valuation justifies its  Value grade, its negative ROE and return on sales are consistent with its  Quality grade. Moreover, analysts expect ROOT’s EPS to remain negative until at least 2022, in sync with the Sentiment grade.

Among the 58 stocks in the Insurance – Property & Casualty industry ROOT is ranked #57.

Beyond what we’ve stated above, we have also rated ROOT for Growth, Momentum and Stability. Get all ROOT Ratings here.

Click here to view the top-rated stocks in the  Insurance – Property & Casualty industry.

Bottom Line 

Despite being one of the most popular companies in the Insurtech space and the stock’s price surge over the past month on the meme stock craze, we think ROOT’s poor fundamentals and lofty  valuation make it best avoided now.

ROOT shares were trading at $10.84 per share on Friday afternoon, down $0.12 (-1.09%). Year-to-date, ROOT has declined -31.00%, versus a 14.75% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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