The free online stock trading platform Robinhood has altered the investing landscape since its app launched in 2015. With a mission of democratizing investing and making it more accessible, the company has brought a lot of new investors to the markets with 13 million users by the end of 2020 and another 6 million added in 2021 already.
The typical Robinhood investor tends to be younger and less affluent with the average account size coming in around $3,500. Compare that to an average account size around $100,000 for E*Trade users and $110,000 for users of TD Ameritrade (which is now owned by Charles Schwab).
If you look at the top 100 most widely held stocks on Robinhood, there is a healthy mix of iconic brands, meme stocks, disruptors, and recent IPOs -- and the majority are tech-oriented. Surprisingly, one stock that checks off a lot of these descriptors but isn't on the list is Root (NASDAQ:ROOT). Here are three reasons why Root is a stock Robinhood investors would love.
1. Root is a disruptor
Root is a company that is part of the growing insurtech industry -- insurance companies whose business models rely primarily on technology. Much like another insurtech company and a Robinhood favorite, Lemonade (NYSE:LMND), Root is a potential disruptor. But while Lemonade provides homeowners' and renters' insurance (along with life and pet insurance), Root is primarily an auto insurance company.
Root allows customers to buy auto insurance and get rates all on its mobile app. Using data science and various sensors, also known as telematics, Root collects your driving data while you're driving, through the app. Based on this driving data, it determines your rates, which you can pay right through the app. The better you drive, based on the categories they measure, the cheaper your rates will be. You can also file an insurance claim from the app in about three minutes.
The company relies on behavioral telematics first and foremost in determining pricing, unlike other competitors. Through its process, it is seeking to eliminate the use of credit scores in pricing, which it calls unfair and discriminatory. In short, Root is looking to revolutionize auto insurance to make it a "more fair, more personal, and much simpler experience." It should be noted that Root has also branched out into renters' and homeowners' insurance on the app, using a similar model.
2. Root has had solid revenue growth
Root was founded in 2015 and just went public on Oct. 27, 2020, opening its trading at $27 per share. Since then, the stock price has declined about 55% and now trades around $12 per share. The stock price took a major swoon after its fourth-quarter earnings report came out, as revenue dropped 51% and the company had a $133 million net loss year over year, compared to an $85 million net loss in Q4 2019. This was due to a few different factors -- fewer people driving caused by the pandemic, a scaled-back marketing budget in the second half of the year, and higher expenses due to investments in technology as it scales up to expand nationally.
But for the full year, there were some promising signs as revenue was up 19.6% for the full year to $346 million and direct written premiums jumped 37% to $617 million, despite a reduction in marketing spend in the second half of the year. Also, the direct loss ratio -- the percentage of income it pays to cover claims -- improved 18 points to 82% for the year.
In 2021, the company expects continued growth with direct written premiums in the range of $805 million to $855 million, an increase of 30% to 40% over 2020. It also plans to double its marketing budget as it expands into more states. Currently, it is available in about 30 states, with plans to add at least a handful more in 2021.
3. Root's stock offers a low entry price
Root's stock price has lost half of its value since the IPO, but it is hard to call this a value since Root is a start-up with no history or profitability so far to measure against. But analysts project a median price target of $18 to $21 per share over the next 12 months. That's likely based on several factors -- its expected growth in net premiums, its expansion into more states, its more aggressive marketing efforts, its competitive technology advantages and ease of use, and its potentially lower costs due to its pricing model. Plus, it has ample liquidity. While its operating cash flow was in negative territory, the company has about $1.1 billion cash on hand from financing activities, up from $416 million at the end of 2019, which it will invest in its growth.
The auto insurance industry is hugely competitive, but with the potential to be a disruptive force, Root is definitely a stock worth watching. I'd probably wait a bit to invest to see continued revenue and premium gains -- as well as profitability -- but this looks like a stock that could benefit investors in the long run.