Root Asserts Better Loss Ratio Control But Heavy Operating Losses Remain

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A Quick Take On Root

Root (NASDAQ:ROOT) reported its Q3 2022 financial results connected November 9, 2022, missing gross but beating EPS statement estimates.

The patient provides individual security solutions successful nan United States via a mobile-first approach.

Management has undertaken awesome costs simplification initiatives, including different ample layoff and sharply reduced trading spend.

Until we spot meaningful advancement toward operating breakeven, I'm connected Hold for ROOT.

Root Overview

Columbus, Ohio-based Root was founded to utilize car information to set car security pricing based connected nan driver's individual driving habits.

Management is headed by co-founder and CEO Alexander Timm, who was antecedently successful various guidance roles astatine Nationwide Mutual Insurance Company.

The institution says it is simply a 'full-stack security carrier...[that owns] astir each facet of argumentation design, origination, underwriting, claims and back-end processing, which enables america to iterate constantly.'

The patient obtains a ample percent of its customers nonstop [DTC] via online integer trading done Facebook and Google.

Management believes that complete clip much of its business 'will people mature arsenic renewal premiums outweigh caller premiums, driving profitability.'

Root's Market & Competition

According to a 2020 marketplace research report by Allied Market Research, nan world car security marketplace was an estimated $739 cardinal successful 2019 and is expected to scope much than $1 trillion by 2027.

This represents a forecast CAGR of 8.5% from 2020 to 2027.

The main drivers for this expected maturation are an expanding number of roadworthy accidents successful galore countries arsenic good arsenic mandated security sum successful much regions and nan implementation of stringent authorities regulations.

Also, emerging economies will besides spot an summation successful discretionary income producing increasing request for centrifugal vehicles and their attendant security sum requirements.

The Asia Pacific region is expected to nutrient nan fastest maturation done 2027 arsenic it increases its take of mobile telematics technologies.

Root faces title from accepted automobile insurers that whitethorn set their go-to-market and exertion offerings to cater to those drivers who wish to see their telematics accusation successful their argumentation calculations.

Root's Recent Financial Performance

• Total gross by 4th has fallen successful caller quarters:

Total Revenue (Seeking Alpha)

• Selling, G&A expenses arsenic a percent of full gross by 4th person fallen recently:

Selling, G&A % Of Revenue (Seeking Alpha)

• Operating income by 4th has remained heavy negative, but has improved successful caller reporting periods:

Operating Income (Seeking Alpha)

• Earnings per stock (Diluted) person besides remained antagonistic but person improved successful caller quarters:

Earnings Per Share (Seeking Alpha)

(All information successful nan supra charts is GAAP)

In nan past 12 months, ROOT's banal value has fallen 78.9% vs. that of Lemonade's driblet of 41.6%, arsenic nan floor plan indicates below:

52-Week Stock Price Comparison (Seeking Alpha)

Valuation And Other Metrics For Root

Below is simply a array of applicable capitalization and valuation figures for nan company:

(Source - Seeking Alpha)

As a reference, a applicable partial nationalist comparable would beryllium Lemonade (LMND); shown beneath is simply a comparison of their superior valuation metrics:

(Source - Seeking Alpha)

Commentary On Root

In its past net telephone (Source - Seeking Alpha), covering Q3 2022's results, guidance highlighted its somewhat improved nonaccomplishment ratio compared to manufacture competitors.

Leadership echoes others successful nan manufacture seeing 'a monolithic displacement successful car security distribution' to online sources.

Despite this, nan institution instituted different headcount simplification of 17%, which guidance believes will trim its yearly tally complaint expenses by astir $50 cardinal erstwhile completed.

As to its financial results, full gross dropped 21.4% year-over-year.

Management did not disclose immoderate institution aliases customer retention complaint metrics.

SG&A expenses arsenic a percent of full gross continued to fall, a affirmative motion connected nan disbursal broadside of nan business arsenic nan patient lowered its costs building to set to existent business conditions.

Operating losses, while still large, continued to beryllium reduced, though nan institution has a agelong measurement to spell to execute breakeven.

For nan equilibrium sheet, nan patient ended nan 4th pinch $819.7 cardinal successful rate and $293.9 cardinal successful semipermanent debt.

Over nan trailing 12 months, free rate utilized was $205.3 million, of which superior expenditures accounted for $2.3 million.

The superior consequence to nan company's outlook is simply a continued precocious inflationary situation contempt a emergence successful nan costs of capital, though utilized automobile prices person precocious travel disconnected their caller highs arsenic nan floor plan shows below:

Used Car And Truck CPI - U.S. (U.S. Bureau of Labor Statistics)

A imaginable upside catalyst to nan banal could see continued improved nonaccomplishment ratio capacity compared to peers, which would apt request to beryllium demonstrated for respective quarters earlier investors could discern a existent trend.

However, fixed Root's ample operating losses, nan patient has a agelong measurement to spell to execute operating breakeven; those losses person been severely penalized successful nan existent marketplace environment.

Until we spot meaningful advancement toward operating breakeven, I'm connected Hold for ROOT.

Editor's Note: This article covers 1 aliases much microcap stocks. Please beryllium alert of nan risks associated pinch these stocks.

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