Auto-insurer Root, Inc. (ROOT), in Columbus, Ohio, which utilizes data and artificial intelligence (AI) to determine rates for its customers, made its stock market debut on Oct. 27, 2020, with a two-million-share initial public offering (IPO). ROOT's IPO is the largest IPO from an Ohio company so far and was the largest Insurtech IPO in 2020.

However, the stock has slumped 82.9% in price over the past year and 69.1% over the past six months and is currently hovering near its $2.84 all-time low, which it hit on Dec. 29, 2021.

While the auto insurance company reported better-than-expected growth in revenue for the third quarter, its widening losses are alarming. Furthermore, ROOT's negative margins and growing operational expenses may prevent it from catching up with its larger peers.

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

Inadequate Financials

ROOT's revenue increased 85.7% year-over-year to $93.8 million for the third quarter, ended Sept. 30, 2021. However, its operating loss grew 93.2% from its year-ago value to $126.9 million. Its operating expenses rose 89.9% year-over-year to 220.7 million. Also, the company's net loss surged 56.1% from the prior-year quarter to $133 million, while its loss per share came in at $0.53. In addition, its net cash used in operating activities increased 284.3% for the nine months ended Sept. 30, 2021, to $364.3 million, while its cash and cash equivalents decreased 25% to $834.1 million over this period.

Weak Profitability

ROOT's 0.79% trailing-12-months CAPEX/Sales multiple is 51.3% lower than the 1.63% industry average. Also, its ROC, gross profit margin and net income margin are negative 56.7%, 13.5%, and 179.6%, respectively. Furthermore, its trailing-12-month cash from operations stood at negative $556.70 million, versus the $137.48 million industry average.

POWR Ratings Reflect Uncertainty

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

Our proprietary rating system also evaluates each stock based on eight distinct categories. ROOT has a D grade for Value and Quality. The company's negative profit margins and higher than industry valuations are consistent with these grades.

Of 55 stocks in the C-rated Insurance – Property & Casualty industry, ROOT is ranked #53.

Beyond what I have stated above, one can view ROOT ratings for Stability, Growth, Momentum, and Sentiment here.

Bottom Line

ROOT's gross written premiums million jumped from $177 million in the second quarter to nearly $205 million, boosting its revenues in the last reported quarter. However, the company's negative profit margin and widening losses in an intensely competitive industry could be concerning for investors. In addition, the stock is currently trading below its 50-day and 200-day moving average of $4 and $7.34, respectively, reflecting a downtrend. So, we believe the stock is best avoided now.

How Does Root Inc. (ROOT) Stack Up Against its Peers?

While ROOT has an overall D rating, one might want to consider its industry peers, Fairfax Financial Holdings Limited (FRFHF), Universal Insurance Holdings Inc. (UVE), and Protective Insurance Corporation (PTVCB), which have an overall B (Buy) rating.

ROOT shares rose $0.01 (+0.34%) in premarket trading Thursday. Year-to-date, ROOT has declined -4.52%, versus a -1.34% rise in the benchmark S&P 500 index during the same period.

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.

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