Root: Major Reversals In Growth And Loss Ratio In Q2 Results (Preview)

Company Update (ROOT US) (Neutral)

Summary

• Root's Q2 results were a major disappointment, with both a significant cut in growth expectations and higher-than-expected losses.

• Management now expects lower growth and a higher loss in 2021, further near-term losses in Direct Contribution, and top-line declines in 2022.

• Actual Q2 results showed modest sequential growth but much higher losses, due to both a worse Loss Ratio and higher marketing spend.

• 2020 performance now seems to owe more to COVID, two key executives left in June, and Root's business model looks more unproven.

• At $6.87, Root is trading at 2.4x premiums, outside our valuation parameters and offering little margin of safety. We remain Neutral.

Introduction

Root, Inc. reported Q2 2021 results overnight on Wednesday (August 11). ROOT shares briefly rose 22% in aftermarket trading to above $8.50, but then fell to a flat-ish level (down 1.1%) at the time of writing.

We downgraded our rating on Root from Buy to Neutral in May after a 33% loss. At Wednesday's closing price…