Multi-bagger potential is hard to come by in an expensive tape. But the multi-baggers are proliferating... NVDA, SMCI, META come right to mind... POWL, APP. I could go on.
We think Root Inc. (ROOT) has multi-bagger potential. It reminds us of MoneyLion Inc. (ML) $30 points ago.
ROOT has many similarities to POWL too. More on that later...
Short-term we are looking for $18. Short-term, as in 2-3 weeks.
Long-term we attach 10% odds our UBER BULL CASE produces a 20-bagger by late 2026. Yes, it has that type of potential. We will get to that too...
ROOT is an unloved, mostly forgotten and broken IPO from 2020 that was relegated to doing a 1-for-18 reverse split a few years ago. ROOT IPO'd at $27, split-adjusted, $468IPO:
ROOT offers app-based, mobile personal insurance solutions. ROOT's AI/sensor technology has allowed the company to successfully disrupt the Auto Industry since its inception in 2015:
Q4 was impressive. ROOT’s top line growth accelerated strongly from Q3, marking a seminal inflection point for the company, its most defining moment yet since its IPO.
Q4 Highlights, included:
"We credit this success to our technology advantage that has allowed us to create a strong product offering for our customers. Our data science driven machine that systematically deploys targeted marketing spend to optimize unit economics and detect trends in the Direct channel also serves as a strong differentiator."
Management sounded very confident on the Q4 call late Wednesday:
Looking ahead, ROOT should continue gaining share, at profitable rates. With a fixed cost-base, ROOT could see a powerful inflection in its business model ANY QUARTER. The flywheel is flowing quickly.
Unsurprisingly, the Sell Side is moving slowly, with its highest PT of $15 not far off from its close on Thursday. Still, having been burned by ROOT two years ago when its fortunes were moving in the opposite direction - burning oodles of cash, with a ton of red ink - the Sell Side always moves slowly in stocks that have had substantial shareholder losses after big reverse splits.
Now though, as they gain market-share due to their AI-based approach, ROOT is winning customers.
Just as the Buy Side guys did in POWL, we can expect them to do the same with ROOT and gun it BEFORE the Sell Side smells the coffee. The Sell Side will follow the stock. Forget that silly $15 PT. That is going to be overrun any day, if not, any hour.
ROOT's revenue beat was the best of this earnings season – better percentage-wise, relative to consensus, than even SMCI. A 53.5% Revenue beat and a very big bottom line beat to boot.
Management exuded confidence on the Q4 call late Wednesday:
When ROOT does reach profitable scale - like SMCI, NVDA, POWL & APP - its fixed cost-basis and small share count will lead to eye-popping, triple digit inflecting EBITDA/EPS growth late this year and, even more so, in 2025.
After a 1-for-18 reverse split a few years ago, ROOT's float is tiny:
Very similar to what POWL's float looks like:
Tiny floats beget MASSIVE EARNINGS POWER when business models inflect. Similar to POWL, we have a very cheap stock here with ROOT.
ROOT’s market cap is tiny at $194M. Remember, it did $194M in revenue in Q4, so viewed this way, the stock is trading for 0.25 of 1x Q4 2023 Revenue Run rate.
Once ROOT becomes consistent EBITDA and cash flow growers in the coming quarters and years, its Price-to-Sales ratio will re-rate in increments, first to 1x sales and then, eventually, a 2x multiple.
This re-rating process gets us a 4-bagger at 1x sales, a 9-bagger at 2x sales, just based off of current revenue run rates.
Based off the exceedingly confident tone about Q1 business trends exuded on the conference call, I think ROOT's Q4 success has carried over strongly into the current quarter. Q1 may be setting up to be a barn burner.
Yes. ROOT is a technology company with an AI engine at its core, driving incremental scale and efficiencies. Yet, it is trading for very low valuations, even after its 50% move higher on Thursday.
Moreover, its balance sheet is strong and the company has the internal capital it needs to cross the chasm into company-wide profitability in 2025, if not sooner.
One can begin to can see how in a very-rare Uber Bull Scenario, we get a 20 bagger here.
Let's assume ROOT doubles its business in 3 years to a Q4 run-rate at $400M a quarter, dropping down serious cash and EBITDA profitability at those quarterly revenue levels. 10% odds this plays out. VERY LOW ODDS!!
Very low odds, notwithstanding, at those revenue and high EBITDA-margin levels, a 2.5x to 3x Price-to-Sales (2.75x at the mid-point) on $1.6B in sales could happen, leading to a $4.4B market cap in the stock. That would be a 22 bagger from here.
While it's nice to dream, let's cross one bridge at a time.
In the very near-term, I expect the stock to bust to new highs, quickly. This is a powerful formation - once the Triple Top is taken out between $14-$14.75, we see quick upside to $18 by the March expiration.
ROOT's CEO will be presenting at the InsurTechNY Insurance Conference on March 1st. This catalyst is only a week away. I am sure he will be doing a lot of 1-on-1s and a big group dinner with big healthcare funds that night.
The shareholder base is pretty spread out too. It will not take many new big boys to get this to new highs. Or in the very likely case where we are already through to new highs, the stock could extend more quickly to the $18 extension zone we plan to sell into.
We are very bullish on ROOT's growth prospects and for the multi-bagger potential we see in the stock at current levels.
We are currently long the March 15 calls. We think they can triple. We plan on adding more to this position and trading around it on any rally in the stock of 10-20% in the coming days and weeks.
We think we see $18 by the March expiration.
We also plan to buy into some stock and the June 10 calls tomorrow, as well, which will serve as our longer-term oriented tranches in this position.
We plan to have our full allocation in place on any move through $14, today's high.
STOP LOSS: We will use the sharply rising 10-day EMA - estimated to be $10.25ish tomorrow - as our STOP on this name. Keep in mind the EMA is coming from very depressed levels and will accelerate markedly in the coming days.
We also plan to use long-term stops on our long-term positions on any 1.5% decisive close below the 50-day SMA.
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Disclosure: We are long the March 15 calls in ROOT. We plan to add more to this position on dips into the $12s the next few days and to also sell on rallies through new highs and to the mid-to-high teens in the coming hours, days and weeks too. We also plan to add stock and June 10 calls tomorrow morning.
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