Root, Inc. (ROOT) Misled Investors About Its Cash Flow and Industry Advantages
Root conducted its IPO on October 28, 2020, selling 26.8 million shares of the Company’s Class A common stock at $27.00 per share for total proceeds of $724.43 million. Leading up to the IPO, Root described itself as an innovator in the personal insurance space with a new data- and technology-driven business model that was ready to disrupt the traditional insurance markets and capture disproportionate market share through the Company’s use of, among other things, telematics. However, the Offering Documents upon which the IPO was based, contained untrue statements of material fact and/or failed to disclose that: (i) Root would foreseeably fail to generate positive cash flow for at least several years following the IPO; (ii) accordingly, the Company would foreseeably require significant cash infusions to meet its cash flow needs; and (iii) despite Root’s touting of its purportedly unique, data-driven advantages, several of its competitors possessed significant competitive advantages over Root with respect to, inter alia, telematics data and data engagement.
On March 9, 2021, a Bank of America Securities analyst initiated coverage of Root with an “Underperform” rating on the premise that the Company is unlikely to be cash flow positive until 2027, finding that Root “will require not insignificant cash infusions from the capital markets to bridge its cash flow needs.” The analyst also noted that insurers Progressive, Allstate, and Geico would continue to impede the Company’s profitability, with Progressive and Allstate having a “sizable advantage over Root in terms of amount of [telematics] data as well as engagement with the data” used to price their auto insurance. On this news, Root’s stock price fell $0.18 per share, to close at $12.17 per share on March 9, 2021, representing a total decline of 54.93% from the Offering price. The stock has yet to recover.