Root (ROOT)

Digital auto insurance company Root (NASDAQ:ROOT) beat Wall Street’s revenue expectations in Q4 CY2025, with sales up 21.5% year on year to $397 million. Its GAAP profit of $0.31 per share was significantly above analysts’ consensus estimates.

Company Overview

Pioneering a data-driven approach that rewards good driving habits, Root (NASDAQ:ROOT) is a technology-driven auto insurance company that uses mobile apps to acquire customers and data science to price policies based on individual driving behavior.

Property & Casualty (P&C) insurers protect individuals and businesses against financial loss from damage to property or from legal liability. This is a cyclical industry, and the sector benefits when there is 'hard market', characterized by strong premium rate increases that outpace loss and cost inflation, resulting in robust underwriting margins. The opposite is true in a 'soft market'. Interest rates also matter, as they determine the yields earned on fixed-income portfolios. On the other hand, P&C insurers face a major secular headwind from the increasing frequency and severity of catastrophe losses due to climate change. Furthermore, the liability side of the business is pressured by 'social inflation'—the trend of rising litigation costs and larger jury awards.

Root competes with established national auto insurance giants including Geico, Progressive, and Allstate, as well as other insurtech companies like Lemonade (NYSE:LMND) and Metromile (acquired by Lemonade in 2022) that also leverage technology and data science for insurance underwriting.

Insurance companies generate revenue three ways. The first is the core insurance business itself, represented in the income statement as premiums earned. The second source is investment income from investing the “float” (premiums collected but not yet paid out as claims) in assets such as fixed-income assets and equities. The third is fees from policy administration, annuities, and other value-added services. Luckily, Root’s revenue grew at an incredible 34.3% compounded annual growth rate over the last five years. Its growth beat the average insurance company and shows its offerings resonate with customers.

We at StockStory place the most emphasis on long-term growth, but within financials, a half-decade historical view may miss recent interest rate changes, market returns, and industry trends. Root’s annualized revenue growth of 82.6% over the last two years is above its five-year trend, suggesting its demand was strong and recently accelerated. Note: Quarters not shown were determined to be outliers, impacted by outsized investment gains/losses that are not indicative of the recurring fundamentals of the business.

This quarter, Root reported robust year-on-year revenue growth of 21.5%, and its $397 million of revenue topped Wall Street estimates by 3.3%.

Net premiums earned made up 91.2% of the company’s total revenue during the last five years, meaning Root lives and dies by its underwriting activities because non-insurance operations barely move the needle.

While insurers generate revenue from multiple sources, investors view net premiums earned as the cornerstone - its direct link to core operations stands in sharp contrast to the unpredictability of investment returns and fees.

Net premiums earned are net of what’s paid to reinsurers (insurance for insurance companies), which are used by insurers to protect themselves from large losses.

Root’s net premiums earned has grown at a 34.2% annualized rate over the last five years, much better than the broader insurance industry and in line with its total revenue.

When analyzing Root’s net premiums earned over the last two years, we can see that growth accelerated to 87.2% annually. Since two-year net premiums earned grew faster than total revenue over this period, it's implied that other line items such as investment income grew at a slower rate. These additional streams do play a key role in the bottom line, but their impact can vary. While some firms have excelled in consistently investing their float, sudden shifts in the fixed income and equity markets can heavily sway short-term performance.

This quarter, Root’s net premiums earned was $367.3 million, up a hearty 22.6% year on year and topping Wall Street Consensus estimates by 3.4%.

Revenue growth is one major determinant of business quality, and the efficiency of operations is another. For insurance companies, we look at pre-tax profit rather than the operating margin that defines sectors such as consumer, tech, and industrials.

This is because insurers are balance sheet businesses, where assets and liabilities define the core economics. This means that interest income and expense should be factored into the definition of profit but taxes - which are largely out of a company’s control - should not.

Over the last five years, Root’s pre-tax profit margin has fallen by 107.4 percentage points, going from negative 151% to 2.7%. It has also expanded by 35.1 percentage points on a two-year basis, showing its expenses have consistently grown at a slower rate than revenue. This typically signals prudent management.

Root’s pre-tax profit margin came in at 1.4% this quarter. This result was 5.4 percentage points worse than the same quarter last year.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Root’s full-year EPS flipped from negative to positive over the last five years. This is encouraging and shows it’s at a critical moment in its life.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For Root, its two-year annual EPS growth of 49.2% was higher than its five-year trend. We love it when earnings growth accelerates, especially when it accelerates off an already high base.

In Q4, Root reported EPS of $0.31, down from $1.30 in the same quarter last year. Despite falling year on year, this print easily cleared analysts’ estimates. Over the next 12 months, Wall Street expects Root’s full-year EPS of $2.32 to shrink by 5.7%.

The debt-to-equity ratio is a widely used measure to assess a company's balance sheet health. A higher ratio means that a business aggressively financed its growth with debt. This can result in higher earnings (if the borrowed funds are invested profitably) but also increases risk.

If debt levels are too high, there could be difficulties in meeting obligations, especially during economic downturns or periods of rising interest rates if the debt has variable-rate payments.

Root currently has $200.3 million of debt and $284.3 million of shareholder's equity on its balance sheet, and over the past four quarters, has averaged a debt-to-equity ratio of 0.6×. We think this is safe and raises no red flags. In general, we’re comfortable with any ratio below 1.0× for an insurance business. Anything below 0.5× is a bonus.

Return on equity (ROE) is a crucial yardstick for insurance companies, measuring their ability to generate returns on the capital provided by shareholders. Insurers that consistently deliver superior ROE tend to create more value for their investors over time through strategic capital allocation and shareholder-friendly policies.

Over the last five years, Root has averaged an ROE of negative 31.6%, a bad result not only in absolute terms but also relative to the majority of insurers putting up 20%+. It also shows that Root has little to no competitive moat.

It was good to see Root beat analysts’ EPS expectations this quarter. We were also excited its net premiums earned outperformed Wall Street’s estimates by a wide margin. Zooming out, we think this was a good print with some key areas of upside. The stock traded up 12.2% to $68.50 immediately after reporting.

Updated: February 25, 2026 at 4:34 PM EST

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

When it comes to Root’s business quality, there are some positives, but it ultimately falls short. To kick things off, its revenue growth was exceptional over the last five years. And while Root’s relatively low ROE suggests management has struggled to find compelling investment opportunities, its net premiums earned growth was exceptional over the last five years.

Root’s P/B ratio based on the next 12 months is 0.8x. Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We're pretty confident there are more exciting stocks to buy at the moment.

Wall Street analysts have a consensus one-year price target of $111.60 on the company (compared to the current share price of $68.50).