This Little-Known Growth Stock Is Up 1,262% Since the Start of 2024. Here's Why It's Just Getting Started.

Since the start of 2024, Root's (NASDAQ: ROOT) stock has surged 1,262% higher. The surge reflects the disruptive insurance company's solid progress in several key areas. Root has grown its customer base and written more policies. More importantly, it has sharpened its underwriting capabilities, leading to improved profitability.

The company has crushed analysts' earnings expectations for several quarters in a row, resulting in a surprising profit in 2024. Root is establishing itself as a contender in the automotive insurance market, and its potential for ongoing success appears promising. Here's what investors need to know about this up-and-coming growth stock.

Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. Learn More »

Root's disruptive approach to automotive insurance

Root is an automotive insurer that prices policies based on driving behavior rather than traditional demographics used by legacy insurers. The company uses mobile technology to track drivers' behavior and provide customized quotes. This approach is known as telematics and has been utilized in the industry for several years. Progressive was one of the first companies to adopt this technology and has used this advantage to crush its peers for years.

Prospective customers download the Root app and drive around with it for a few weeks. The app runs in the background and tracks driving behaviors like speed, braking, and distracted driving. From here, Root provides quotes focused on each individual's unique driving habits. With the slew of driver data, Root can refine its pricing models over time to balance growth alongside profitability.

Image source: Getty Images.

Root's underwriting has improved substantially

Telematics alone doesn't make Root a good investment. After all, the most crucial thing upstart insurance companies need to figure out is how to price policies while still growing their customer base. This can take years as companies build up their data and knowledge base and iterate on it over time.

Understanding some key ratios in the insurance industry can help. The expense ratio measures how much a company spends on expenses (like salaries and overhead) compared to premiums collected. Meanwhile, the loss ratio measures how much money a company pays out in claims compared to premiums.

Together, these two ratios make up the combined ratio. Profitable insurers want a combined ratio below 100%; the lower the ratio, the more profitable they are at writing insurance policies.

This is where Root has made tremendous progress. In 2022, Root's combined ratio was 195%, indicating that the company paid $1.95 in expenses and losses for every $1 in premium collected. In 2023, it improved to 133%. Last year, Root's combined ratio was a solid 96.4%, showing that it finally earned an underwriting profit for the first time.

This resulted in net income of $30.9 million -- a dramatic improvement from its $147 million loss and $298 million loss in 2024 and 2023, respectively.

ROOT Revenue (Quarterly) data by YCharts.

This improvement surprised analysts covering the company and is a big reason the stock has skyrocketed. Before last year, Root struggled mightily to get its underwriting in order, and the stock got hammered. From its initial public offering in 2020 through early 2023, Root saw its stock fall over 99%.

This stellar underwriting performance came while Root continued to grow its business. The number of policies in force was 414,862, and premiums earned were $1.2 billion, nearly double the total in 2023.

There is more room for growth

Root's improving profitability could be a critical inflection point for its business, which is why I recently started building a small position in the insurer. Its underwriting has improved tremendously, and the company is positioning itself well in the highly competitive automotive insurance industry.

There is also further runway for growth. Root currently operates across 35 states and recently added Minnesota to this list. The company has room to expand into other states, which could drive more premium growth. Root has made significant progress, and despite the massive run-up in the stock, I think it is a solid growth stock for long-term investors to add today.

Don’t miss this second chance at a potentially lucrative opportunity

Ever feel like you missed the boat in buying the most successful stocks? Then you’ll want to hear this.

On rare occasions, our expert team of analysts issues a “Double Down” stock recommendation for companies that they think are about to pop. If you’re worried you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:

• Nvidia: if you invested $1,000 when we doubled down in 2009, you’d have $300,764!*
• Apple: if you invested $1,000 when we doubled down in 2008, you’d have $44,730!*
• Netflix: if you invested $1,000 when we doubled down in 2004, you’d have $524,504!*

Right now, we’re issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.

Continue »

*Stock Advisor returns as of March 3, 2025

Courtney Carlsen has positions in Progressive and Root. The Motley Fool has positions in and recommends Progressive. The Motley Fool has a disclosure policy.