The stock market has soared higher in 2024, with the S&P500 index increased by 21%. Against this background, Root Inc.(NASDAQ: ROOT) has become a breakout stock. This company is not just riding the wave of growth; it’s also making waves of its own, with its stock up more than 600% since the start of the year.
Investors were pleasantly surprised when the company announced its first profitable quarter since going public, something few expected. If you’re considering investing in this innovative growth stock today, consider the following.
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Root is a tech-driven auto insurance company that has gone through an absolute meltdown. The small company started the year with a bang when it reported better-than-expected revenue and earnings per share numbers during its February earnings call. The stock went from $9 before the earnings report to nearly $84 in the weeks that followed.
The company said its path to profitability was becoming increasingly visible, kicking off the stock’s sharp rally. Now investors are starting to see this vision become a reality.
Root shocked investors when it announced 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’ expectations of a loss per share of $0.98.
In the third quarter, Root’s net premiums earned were $279 million, representing 180% growth from a year ago. Through the first three quarters of 2024, Root’s earned premiums were $771 million, up 244% from last year.
ROOT revenue chart (quarterly).
When it comes to emerging insurance companies, rapid growth often comes at the cost of rising claims costs and expenses. However, this has not been the case with Root this year. The company has experienced tremendous revenue growth and is managing expenses and keeping claim costs under control.
The core of Root’s business is technology and data science. The company uses driving behavior collected through the app, including speed, kilometers 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 are continually iterating and innovating what we believe is one of the fastest developments in the industry.”
A crucial measure for insurers is the combined ratio: the ratio of claims costs plus expenses divided by earned premiums. A metric below 100% means an insurer is profitably writing policies, and the lower the ratio, the more profitable it is.
Root’s combined ratio was a stellar 91.1% in the third quarter. These aren’t just rivals Progressiveone of the best auto insurers around, but it was a huge improvement from a year ago, when the combined quarterly ratio was 143%. Through the first three quarters of this year, Root’s combined ratio is 98.3%.
Root reported excellent quarterly results and beat analyst expectations for several quarters in a row. As a potential investor, I find that growth encouraging, but I want to see if Root’s excellent underwriting and policy growth can continue in different pricing environments.
Last year, Root struggled with the entire property and casualty industry, which had a combined loss of $24 billion by 2023. Things have improved across the sector; by 2024, non-life insurers will have posted underwriting profits of $3.8 billion, which has undoubtedly been a boost for insurers like Root.
Investors purchasing the stock should be aware of its high volatility. Beta measures the risk of a stock 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 these highly volatile stocks and should consider investing in stable, established companies with a long track record of success, such as Progressive or Chubb. However, investors with a high risk tolerance and who are looking for innovative disruptors may see Root’s substantial progress as a green light to buy today.
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Courtney Carlsen holds positions in Progressive. The Motley Fool holds positions in and recommends Progressive. The Motley Fool has a disclosure policy.
This small-cap growth stock is up 600% in 2024, and its recent results have shocked investors. Is the stock a buy today? was originally published by The Motley Fool
