Why Shares of Root Stock Sank in December

Shares of Root (NASDAQ: ROOT) sank 27.3% in December, according to data from S&P Global Market Intelligence. The insurance technology (insurtech) upstart saw a pullback after gaining over 100% after fantastic third-quarter (Q3) earnings at the end of October. As a volatile stock, Root is still up over 500% in the last 12 months after it made a miraculous growth and profit turnaround in 2024. Thought to be close to bankruptcy, Root stock is still down 85% from all-time highs set close to when it went public in 2021.

Here's why Root stock pulled back 27.3% in December.

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An insurance technology turnaround

Root's aim is to bring digital technology to the car insurance market. Instead of basing its insurance policies on demographics and broad factors, Root uses smartphone technology to offer car insurance prices based on how people actually drive. The novel idea had a lot of backing in the 2021 bull market, with investors bidding up the stock with extreme fervor. In the years following, it looked like this idea would not work in practice as Root's net losses kept piling up, making it seem like the car insurance operator couldn't generate a profit.

That is, until 2024. Last year, Root's income statement kept inching toward breakeven until Q3 of 2024 when it finally hit a positive net income of $23 million. At the same time, the company's net premiums earned have skyrocketed, up to $279 million last quarter compared to $100 million in the same quarter a year ago. Not only is Root able to grow its customer base at a rapid rate but to do so in a profitable manner. After this report, Root's stock soared over 100%, going from around $40 a share to a peak of close to $110.

There isn't a specific news item for why Root stock sank in December. It can be chalked up to a pullback after its recent run-up along with a broad market sell-off for high-growth companies. Root has a high short interest on its stock, which can add even more volatility, especially for a smaller company. Root currently has a market cap of around $1 billion. Up or down, investors should expect more volatility in the future for Root shares.

Is the stock a buy?

Root's miraculous turnaround has the stock up over 500% in 12 months, but it is still down over 80% from all-time highs. At a market cap of $1.17 billion, it is still a small stock with a much lower market cap than legacy competitors like Progressive with a market cap of $140 billion.

Assuming Root can keep generating positive net income, the stock is not overly expensive either. A quarterly net income of $25 million puts shares at a price-to-earnings (P/E) ratio of 11.7. If you are bullish on the growth of Root's insurtech business model, it might be smart to buy some shares here on this pullback.

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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Progressive. The Motley Fool has a disclosure policy.