The Best Roots Since Kunta Kinte: Root Inc $ROOT

There are a thousand hacking at the branches of insurance to one who is striking at the root.” - Henry David Thoreau if he were an insurance analyst probably

As a lot of sectors have started to rebound from their lows and as the market starts to get a bit frothy, I am left with a difficult choice. Should I only write about Energy, Healthcare, Chemicals, Restaurants, and maybe a handful of other sectors or subsectors that are still near their lows, or should I keep turning over rocks in the whole market, even though it means writing about things that aren’t nearly as cheap as I would like?

Here is an example of what a writeup will look like when there are no more sectors left at the lows:

Root Inc (ROOT) is a technology driven auto insurance platform, and its stock price has been cut in half since March, falling from $170 a share to $88, but as recently as February of 2024, it was an $8 stock. Why did it run up so much only to be cut down?

Root is an insurtech company, and their primary innovation is to use mobile phone data to estimate how safe of a driver someone is. In doing so, they can price auto insurance more accurately, and attract safe drivers to their platform. Discovering what we have seen time and time again, direct to consumer marketing only enriches Google and Facebook. So Root made some strategic partnerships, and revenue grew from $67 million in Q3 2023 to $382 million in Q2 2025, growing an average of 24% per quarter for the last 8 quarters. Root has a strategic partnership with Carvana, which gives them exclusivity until 2026, and they just launched a partnerships with Hyundai Capital and Experian this year, although they aren’t exclusive it should help continued growth.

Is Root’s mobile phone data working to improve auto insurance? Yes, it looks like it. Insurance companies measure loss ratios, it’s the other side of the gross profit margin. With 14% market share each, Progressive and Geico have loss ratios of 69% and 72% in 2024. So their gross profit margins were 31% and 28% respectively. Root had a loss ratio last quarter of 58%, which corresponds to a gross profit margin of 42%, significantly better than the two market leaders. Root’s long run goal is a loss ratio of 65%, so they have room to absorb some costs and still be within their target. Less efficient auto insurance companies like State Farm with 16% market share has a loss ratio of 83%, or a 17% gross profit margin. Root has gross profit margins that are 50% better than Warren Buffett’s Geico, and are 150% better than State Farm. That’s a pretty incredible innovation. As long as customer acquisition costs can be managed, and their AI underwriting doesn’t hallucinate and misprice things, it looks like Root can take significant market share by underpricing all major competitors.

And unlike a lot of growing tech companies, Root is currently profitable, with $85 million of net income in the trailing 12 months, $197 million of operating cashflow. One of the big drawbacks of tech companies is the dilution needed to achieve growth, but Root is in a much better position than most. They will still dilute some, stock based compensation is the scourge of tech, and insiders have only been selling since the stock was around $10, but as far as growthy companies go, they aren’t terrible. Root still has some founder DNA, with a co-founder, Alex Timm, still at the helm as CEO. Two major venture capital firms own a combined 41% of the company, so their eventual sales will suppress the stock price, but that will probably happen when their market share is over 5% and not one third of one percent.

It’s helpful to check in with techy growth companies once in a while. There has recently been some doomer opinions about AI not amounting to much. Root uses machine learning to compile driving data to ascertain whether or not a driver is safe, then to price their policies, and then personalize and target advertising spend. They also use machine learning to process claims and to help with fraud detection. With the ability to generate profit margins better than established market leaders, I would say the AI revolution is alive and well. It’s a race now to see how much market share Root can take before their competition adapts, or they get acquired. Both Progressive and Geico are doing trials with telematic data now.

We are all familiar with value traps, companies that seem cheap, but they stay cheap, or God forbid, get even cheaper. But there is such a thing as a growth trap, Nvidia is probably one now. Valuing growth isn’t easy, and estimating it is even less easy. Investors are happy to pay up for growth, and they are even happier to pay up for accelerating growth. But nothing grows to the sky, and when that growth slows, multiples compress, and stock prices collapse.

At the peak, Root closed at $177 on March 24th. It sold off as we headed into that April crash, and it sold off further when Q1 2025 revenues came out below Q4 2024. Revenue fell quarter over quarter from $360 million to $349 million, but subsequently grew to $382 million for Q2 2025. Even with the return to growth, the stock price fell more as management guided toward a GAAP net income loss for Q3 due to the effects of some Carvana warrants expiring worthless, and increased research and development spending to improve marketing channels. Growth stocks are fragile, and it doesn’t take much bad news to bring them crashing down.

But now Root trades at a price to sales ratio of about 1.0x, which is cheap as far as growth stocks go. If they return to a rule of 40 company, where growth plus free cash flow margins add up to over 40, then the price to sales multiple would typically be above 3.0x. Free cash flow margins are currently about 14%, but that can improve as economies of scale help to absorb fixed costs. Can a company who has averaged 24% growth quarter over quarter keep on growing 26% year over year and stay in that rule of 40? I think the odds are pretty good, Root has several growth initiatives in front of it, and two new partnerships that only rolled out this year.

The US auto insurance market is about a $360 billion annual industry, but only about $4.5 billion of that market uses a telematics analysis like Root. In the last 12 months, Root did about $1.3 billion of volume. Root’s market share is still about one third of one percent, and they are dramatically outperforming on profitability. As safer drivers want telematics analysis to lower their insurance bills, the less safe drivers will remain with traditional insurance firms, further worsening the loss ratios of legacy carriers. Root has the power to cause an adverse selection problem for their competitors, it is a powerful innovation.

An aggressive growth company can easily trade upwards of 8.0x price to sales, and Root is currently trading at 1.0x price to sales. Management seems to think that the sales growth engine can come roaring back to life, but Root is heading into an ugly earnings call next quarter. Beyond next quarter, however, if Root continues to grow at 30% annual rate or higher, that would put 2027 revenues around $2.3 billion, and a 3.0x price to sales ratio would imply a share price of $510. A price to sales of 5.0x would be a share price of $851, and a 40% growth rate and a 5.0x price to sales multiple would put the share price at $987.

Growth stocks can fetch amazing prices, if they can maintain profitable growth, and Root might be able to continue disrupting this industry. I would have loved to have found it at $8, but insurance isn’t one of my core competencies. Being late to the party, it still has enormous potential. Usually 1.0x price to sales is my exit valuation and not my entry, but this is growthy tech. Will the price fall on the next earnings call? Maybe, but at 1.0x price to sales, it isn’t at a lofty valuation. It’s a company that is probably worth a small placeholder position at these prices, and if another dip does come along, it would be worth adding to.

Root Inc (ROOT) $88.80: $510 by the end of 2027.