Forget SMCI stock: Root share price is doing much better

Super Micro Computer (NASDAQ: SMCI) has made headlines this year, as the company came from nowhere to become one of the best-performing companies in Wall Street. It has surged by more than 253% this year, giving it a market cap of over $60 billion. It even entered the S&P 500 index on Monday.

But SMCI is trailing another technology company. Root (NASDAQ: ROOT) stock price is up by more than 1,524% in the past 12 months and 467% this year alone. This remarkable surge has brought its valuation to over $766 million.

Root stock price vs SMCI

Comparing Root and Super Micro Computer is like looking at apples and oranges. Super Micro is a hardware company that creates servers and other items that have become essential in the age of artificial intelligence (AI), data centres, and cloud computing.

Root, Inc., on the other hand is a company that is disrupting the insurance industry using technology. It makes it easy for people to take car insurance in the United States, a large industry that is now dominated by the likes of Geico and State Street.

Root stock price surge accelerated after the company published exceptional financial results. Its revenue jumped by 173% in the last quarter to $194 million and the management expects that the trend may continue.

Its gross written premium rose by 25% QoQ and 129% YoY. It also narrowed its loss substantially to about $24 million while its EBITDA neared its breakeven point. Investors believe that Root can continue growing and taking market share in the industry.

Root is also in an industry whose pricing has been growing in the past few years. The average annual premium to insure a car rose by 26% in February to $2,543 and this trend could continue in the coming months. 

Auto insurance has jumped because of the substantial car repair costs and natural disasters in the country. Therefore, as an auto insurance company, Root needs these high prices to remain while the number of incidences drops.

The most recent results showed that it had a gross accident period loss ratio of 66%, one of the best in the industry. It had a ratio of as high as 94% in Q4 of 2021.

The challenge that many investors may find is that the company’s valuation is not cheap. An analyst conducted a DCF valuation using the industry CAGR of 2.17%, a discount rate of 12% and a 5% risk premium and placed a target of $11.36, which is much lower than the current price of $58.

I believe that Root’s stock price has gone quickly too soon, making it highly overbought, and exposing it to reversal risks.

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