Root Inc stock price surged after earnings: buy or sell?

Root (NASDAQ: ROOT) stock price continued its remarkable bull run as it jumped to an all-time high in the pre-market. It soared by almost 30% and reached a high of $90, bringing its market cap to over $1 billion.

Root, Inc. stock is beating most companies in Wall Street. It has surged by more than 1,500% in the past 12 months and by 565% this year alone. In contrast, Lemonade, another insuretech company, has risen by just 52% in the past 12 months while the tech-heavy Invesco QQQ ETF has soared by 32%.

Root’s stock has also beaten other popular names like Nvidia and Super Micro Computer, as I wrote here. This performance is happening as the company continues delivering blockbuster financial results.

Root said that its policies surged by over 100% to 401,255. This, in turn, led to a 146% revenue growth to over $331 million. Gross premiums earned soared to $275 million while the gross accident period loss ratio rose by 4 points to 61%.

These numbers mean that the company’s revenue growth is accelerating. Analysts believe that its annual revenue for the year will soar to over $936 million, up from last year’s $400 million. 

Most importantly, the company is narrowing its losses. Its net loss in the first quarter came in at $6.2 million, a big improvement from Q4’s loss of over $24 million. It made $40 million in the same quarter in 2023.

For starters, Root, Inc. is a technology company that is disrupting the insurance industry. It was created to reduce the complexity that exists in the insurance industry. 

It does that by leveraging big data to simplify how vehicle insurance works. For example, its application has been downloaded over 13 million times and has over 25 billion miles of driving data. Its insurance costs are often lower than other companies.

A key concern among investors is the company’s valuation. It now has a market cap of over $1.2 billion against expected 2024 revenue of over $859 million. Some analysts believe that this gap makes it highly overvalued.

However, it is easy to justify this valuation because of its remarkable growth. For example, assuming that it makes $1.2 billion in revenues in 2025 and it stops investing for growth. That means that its net profit would be over $200 million based on the average profit margin in the auto insurance space.

ROOT chart by TradingView

In my last article on Root stock, I noted that the company had more room to grow, which has happened. It has now invalidated the double-top pattern that has been forming. The upper part of this pattern was at $85.96 while the neckline was at around $50. 

Root’s shares remains above all moving averages while the Relative Strength Index (RSI) and the Stochastic Oscillator have all pointed upwards. Therefore, the upward momentum will likely continue in the next few days. That means that the stock could surge to about $100.

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