ROOT had a monster quarter as @stocknovice said in this post.
Here is the rundown:
Shareholder letter
ER
Results
-
Gross written premium was $332m, up 113% yoy and I expected $330m.
-
Gross premium earned was $317m, up 134% yoy and I expected $320m.
-
Revenue was $305.7m, up 165% yoy vs consensus expectations of $276m and my own expectation of $304m. So a huge top-line beat.
-
Net income was $21.7m which is a net income margin of 7% (!!! - see later).
-
EPS was $1.35 vs consensus of -$1.03. This was the biggest and most consequential beat.
How did they do it? Well the CFO summed it up best:
For the third quarter, we delivered net income of $23 million, a $69 million improvement year-over-year. Along with this milestone achievement, we generate an operating income of $34 million and adjusted EBITDA of $42 million, year-over-year improvements of $68 million and $61 million, respectively.
Our outstanding results continue to be driven primarily by growth in our net earned premium, loss ratio performance, closely managed expense base and the responsible deployment of marketing investment.
For me this quarter is huge because they’ve now proven the business model. The table below shows the net income margins of the past years, and this quarter was the inflection point.
| NI % | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2000 | -85% | -27% | -169% | -262% |
| 2021 | -145% | -199% | -142% | -118% |
| 2022 | -91% | -119% | -90% | -82% |
| 2023 | -58% | -49% | -40% | -12% |
| 2024 | -2% | -3% | 7% |
There is one more part of what the CFO stated above which needs unpacking and that is the loss ratio performance. That was also great, the CEO said in the call he believes it is industry leading:
And of course it all came together in the combined ratio which was just terrific.
| Gross combined ratio | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2021 | 156% | 197% | 173% | 144% |
| 2022 | 136% | 152% | 130% | 132% |
| 2023 | 123% | 118% | 119% | 110% |
| 2024 | 100% | 100% | 89% |
Other bits and bobs
They generated a lot of operating cash flow, so this is not a case of cash-flow being somewhere in the future. OCF was $50m in the quarter.
They continue to grow their partnership channel, which has lower churn than their direct model, and it grew new writings 131% yoy, and now contributes 24% of new writings in the quarter vs 10% a year ago.
Also the CEO stated in the Q&A that each new cohort that they sign up has better churn dynamics that the one that went before, ex the impact of the better churn of the indirect channel.
They refinanced a term loan on 29 October, which will reduce their interest expense by 50% going forward.
Lastly they have a lot of runway for growth left via geo expansion and channel expansion, all while further improving their AI-led moat.
Share price reaction
It’s not often that I quote myself, but I’m making an exception on this one 
@Fool4ZTribe said that he believed that 7% margin is the key, and I agreed.
I was saying if they can get to a 7% margin in 3 years, we have a potential 3-4 bagger on our hands. Well guess what? They hit that exact margin this quarter. I assumed they could eventually get there, but they just did it now!
Just on current EPS alone, the stock could easily run much more.
On a run-rate annualised basis based on Q3 Net Income (i.e. with no further growth or profitability improvements) the annualised net income is $86.8m. A modest PE of 15x on that gives a market cap of $1.3bn.
In post-market trading last night the stock was up 84%. That would imply a market cap of around $1.1bn if it settled there. We’ll have to see where it eventually lands.
The share price pop is not meme-like imo.
It is actually quite modest. And there could very well be much more in the tank.
-wsm.