$ROOT: Undervalued disruptive tech stock

$ROOT is an extremely undervalued disruptive tech stock potentially set up for a gamma squeeze [DD]

DD

Alright retards, disruptive tech has been hit hard, so buy the fucking dip and either go broke or get rich with me (thanks be to Jpow). I think ROOT is a solid disruptive tech play that will hit so hard it may even make the current resurrection of tanker gang on the homeland make sense. That or I will GUH on 4/16 after market close.

This is financial advice. Listen to me or your broker will naked short ladder citadel using your account ETFs and leave you the bill.

ROOT is an insurance tech (or insurtech) company, which is considered the "next big opportunity after FinTech," as the insurance industry is considered to be at a "key inflection point" in a pivot to insurance tech companies (source). The insurance tech market worldwide was valued at $2.72 billion in 2020, and that valuation is expected to grow with an insane CAGR of 48.8% from 2021 to 2028 (source). ROOT primarily provides car insurance, though it is expanding its home insurance business.

ROOT uses something called "telematics" to offer extremely low car insurance rates to good drivers. Telematics is basically using all sorts of technology to monitor cars. The algorithms applied to and data derived from ROOT telematics are 10x more predictive of driving risk and accidents than typical predictors used by normal insurance companies. This allows ROOT to tailor insurance pricing to driving risk with 10x more accuracy than other companies, saving both ROOT and their customers a ton of money at the same time. In addition, ROOT does not insure bad drivers--because 30% of drivers cause nearly 45% of accident costs--resulting in better margins for ROOT. ROOT's app (used to collect data) is pretty, can do everything related to the insurance (e.g., filing a claim), and most importantly, is quite good at picking important stuff out. For example, it can determine whether you're the passenger or driver in a car, or if you're biking, taking a bus, or taking a train (source), so it accurately determines driving risk. Their setup also circumvents issues related to turning off one's phone etc. in that if your phone goes off or the app is closed/blocked during the trial period, the two-week trial period that determines your quote is disrupted and starts over (source). Once the trial period is over, the data they collect is used to further refine their AI and sold to interested parties. ROOT does not sell personally identifiable data, but they do sell nonidentifiable data. These data are quite valuable to everyone working in the self-driving car industry as well as other insurance companies. This is another source of revenue for ROOT. In short, ROOT uses tech to make sure they don't insure bad drivers and to provide the lowest rates possible to their customers.

I had to pay a fuckton of money for insurance when I first started driving because of my demographics, even though all of my friends routinely told me I drove like a grandma. I fucking hated paying as much as I had to for insurance given how good of a driver I am, and ROOT appeals to people like me hard.

ROOT is still in the early phase of its growth stage. They are currently licensed in 30 states but have recently acquired a shell company with licenses in all 50 states, which will allow them to expand into all states. I'm not sure of their exact timeline for doing so, but according to one article, they plan to aggressively and methodically expand nationwide during 2021--hiring managers with experience in each state they're expanding into.

Here's why I think ROOT is a good play.

ROOT is absurdly undervalued for a growth company

I first found ROOT by looking through a screener for undervalued growth stocks, judging by the price/sales/growth (PSG) ratio. The PSG ratio is similar to the PEG ratio, except it works really well to measure the value of growth stocks rather than stocks of mature companies (which are typically better assessed via PEG). A stock's PSG ratio is calculated as its price/sales ratio divided by its 3-year or 5-year sales growth, expressed as a percent. Prior work published on a site I can't link (I can't link the site that seeks alpha, right? I know I can't on the homeland) found that stocks with PSG values between 0.00 and 0.20 consistently beat the market, whereas negative or higher PSG ratios than 0.20 underperformed.

ROOT's PSG ratio is 0.07 (3-year growth) or 0.13 (5-year growth) depending upon whether 3- or 5-year growth is used as the denominator. How does that compare to other growth companies?

P/S/G 3-year P/S/G 5-year

RKT 0.02 0.04

ROOT 0.07 0.13

AMZN 0.13 0.14

SQ 0.16 0.20

ZG 0.18 0.22

TSLA 0.49 0.37

SHOP 0.68 0.61

LMND 0.70 1.29

As you can see, ROOT's PSG is absurdly low: lower than AMZN's and many other popular growth stocks—though not as low as RKT's, which is stupid low. In every backtest I've done or seen, a PSG this low is very likely to outperform the market over the next year.

ROOT is extremely undervalued compared to its only publicly traded peer

ROOT's primary publicly traded peer is LMND. They're different companies, in that LMND offers homeowner's/renter's/pet insurance but not car insurance, whereas ROOT primarily focuses on car insurance but has been expanding homeowner's/renter's insurance. But they're both insurtech companies in their growth phase and can be compared somewhat. ROOT's 5-year revenue growth is almost twice that of LMND's, and ROOT's cash flow growth rate is over twice LMND's. Additionally, ROOT's price/sales ratio is 6.8 and LMND's is a whopping 42.85. Accordingly, ROOT's PSG ratio is about 1/10th the size of LMND's (remember, smaller is better). If ROOT was valued at LMND's P/S ratio, it would be trading at $80 per share. If ROOT was valued at LMND's 5-year PSG ratio, it would be trading at $124 per share. These are a bit extreme (LMND is overvalued by any metric), but this further illustrates that ROOT is extremely undervalued.

Analyst consensus points to 57% upside for ROOT

Usually I don't give a shit about analysts because their recommendations are awful at forecasting stock prices. I know some people like analyst consensus, though, so I figured I'd mention it. Out of 13 analysts, 4 give a buy recommendation, 8 hold, and 1 sell. The consensus price target for those analysts is $20.08, which equates to a bit over 57% upside over the current share price.

Insider purchases of ROOT are very bullish

Over the last six months, insiders have bought a combined $12.5 million shares of ROOT and sold $2.8 million. Looking at those sales on Fidelity, many of them were automatic sales. Insiders sell stock all the time, but they only buy for one reason: they think that the stock will go up. And insiders have put a net $10 million of their own money on that over the last six months.

ROOT has a number of high-profile institutional tech investors

I probably don't care as much about institutional investors as I should, but I know some people care about them a lot. ROOT's institutional investor list includes the high-profile tech investment firms of Silver Lake, Dragoneer, Coatue, Hillhouse, Tiger Global, Whale Rock, Durable Capital, DST Global, Redpoint Ventures, and Ribbit Capital, among others.

ROOT is a founder-led company

ROOT's CEO is its (co-)founder, and a Harvard Business Review study found that stock prices of founder-led companies in the S&P 500 outperform stock prices in other companies in the S&P 500 that are not founder-led by a factor of 3.1x (source). Impressively, those data were published before TSLA had any sort of a rise (data analyzed went to 2014). This outperformance could be because founder-led companies tend to be more innovative (source). Whatever the reason, the fact that ROOT is led by its founder is a good sign for its stock long-term.

ROOT is set up for a gamma squeeze

Who am I kidding about long-term potential? I want instant gratification. Open interest in ROOT's 4/16 calls accounts for 1/8th of ROOT's float, even without the call option buying from today (which was a lot, and largely at ask according to Fidelity). The majority of ROOT's open interest is in OTM calls. And, most of ROOT's put option OI is OTM (below the current price). So every bit ROOT moves up, a lot more calls need hedged whereas puts can be de-hedged. If ROOT can hit $15 before 4/16, there's a clear and smooth gamma ramp to $25 and beyond. Take a look at the OI chain:

https://finance.yahoo.com/quote/ROOT/options/

IV is fairly elevated, but not horrendously so, and because shares are cheap, the price of calls is reasonable.

ROOT is highly shorted

ROOT's price is currently suppressed because of short selling. According to S3, ROOT is currently the most shorted stock on the market (42.15% SI of float by S3, 42.11% by Ortex estimates, and 40.88% by the last reported FINRA data). Now, usually that would drive me away from the stock (except for REDACTED, I will admit I am guilty of jumping into that play back in November). Most often, highly shorted stocks are highly shorted for good reason: they might go bankrupt. But ROOT isn't about to go bankrupt. It's a growth stock with extremely high YoY growth and plenty of ability to attract financing, as it has done historically. Our good friend Andrew Left of Shitron finally figured out how to work his webcam, but more importantly for this DD, published a report on ROOT, saying that it is a "misunderstood short" and that it should be trading at least at its IPO price ($27)--if not substantially higher. In my absolute retardation, I consider shorts on a company that isn't going bankrupt to be longs that just haven't bought yet. If ROOT gamma squeezes hard, that could lead to some margin calls if shorts haven't properly hedged with calls. If they have hedged with calls, that'll just help the gamma squeeze. Literally can't go tits up?

Potential downsides and bear case

ROOT is embroiled in some legal battles related to alleged misrepresentations of the company at its IPO. These misrepresentations supposedly include misrepresentations of customer acquisition costs and the relative advantage of ROOT relative to other insurance peers in telematics data and data engagement. The lawsuit also states that an analyst has alleged that ROOT will not be cash flow positive until 2027 and will require, in the analyst's opinion, significant cash infusions. There are two main responses to this issue that matter as far as new investors are concerned. First, these issues have all been heavily priced in at this point; there is not a place you can go to look at ROOT stock that you don't see a reminder of these lawsuits. Moreover, growth forecasts have already been adjusted downwards with all of this information, and ROOT is still as undervalued as I described above--those numbers for growth forecasts and price/sales are current. Second, prior to ROOT going public, the early institutional investors in ROOT had access to all of this information and chose to invest at the equivalent of roughly $27/share. There hasn't been any institutional or insider selling since this lawsuit has surfaced, so insiders/institutions are not jumping ship. And importantly for anyone thinking of getting in now, this has already been priced in and ROOT is still massively undervalued.

The second potential downside for ROOT is that their moat is currently all in their app, and any other insurance company could roll out some similar thing. However, other insurance agencies can't suddenly drop all of their dangerous drivers without trashing their reputation and potentially facing legal action, whereas ROOT can choose not to insure bad drivers from the get-go without hurting their reputation. That alone gives ROOT an edge in the sense of not having to pay for more accidents. More importantly, no other insurance company is close to having refined their algorithms nearly as much as ROOT. Software is always at risk of competition, but ROOT's is a landslide best for the time being, and an early edge is a big one in disruptive tech.

The third potential downside for ROOT is the same one facing all of disruptive tech: Yellen hates America and Powell is racist. But in seriousness, rising yields have been fucking over disruptive tech. Yields are currently higher than they were for much of 2019, though, so they can't keep going up too much higher--right? Jpow pls :(

TLDR: ROOT is a deeply undervalued, rapidly expanding company in a rapidly growing industry. It has all the qualities it needs to succeed long term and is at an excellent entry point, but more importantly for us retards, it's set up for a potential gamma squeeze.