Covering IPOs, Healthcare and Technology Stocks

Andrei Zakharov

Algosun Global

Equity Capital Markets

<a href="https://www.smartkarma.com/entities/oscar-health-inc" target="_blank" data-smartkarma-citation="entities:31499:1" rel="noopener">Oscar Health (OSCR US)</a> is technology-driven and consumer-focused health insurer with the best-in-class in-house built technology and customer service. VC-backed insurtech unicorn wants to disrupt and transform health insurance through engagement technology. <a href="https://www.smartkarma.com/entities/oscar-health-inc" target="_blank" data-smartkarma-citation="entities:31499:1" rel="noopener">Oscar Health (OSCR US)</a>  helps to save money and optimize spending for its members using the personalized data to drive real-time actionable insights and recommendations.Morgan Stanley, Goldman Sachs and Allen &amp; Company are lead underwriters on the IPO. <a href="https://www.smartkarma.com/entities/oscar-health-inc" target="_blank" data-smartkarma-citation="entities:31499:1" rel="noopener">Oscar Health (OSCR US)</a>  raised ~$1.6 billion in funding over 10 rounds, according to Pitchbook and Crunchbase. The expected price range on the IPO of 31 million shares was raised to $36-38 per share and today Oscar Health sold shares at IPO price of $39 per share implying valuation of ~$8 billion.

Oscar Health (OSCR US) is technology-driven and consumer-focused health insurer with the best-in-class in-house built technology and customer service. VC-backed insurtech unicorn wants to disrupt and transform health insurance through engagement technology. Oscar Health (OSCR US)  helps to save money and optimize spending for its members using the personalized data to drive real-time actionable insights and recommendations.Morgan Stanley, Goldman Sachs and Allen &amp; Company are lead underwriters on the IPO. Oscar Health (OSCR US)  raised ~$1.6 billion in funding over 10 rounds, according to Pitchbook and Crunchbase. The expected price range on the IPO of 31 million shares was raised to $36-38 per share and today Oscar Health sold shares at IPO price of $39 per share implying valuation of ~$8 billion.

Oscar Health IPO. Reinventing Health Insurance

Korea/Asia, Events, IPOs, Douglas Research Advisory

Douglas Kim

Korea/Asia, Events, IPOs

In this report, we review our IPO investment research in 2020, including the performance of our calls and how we plan to change our process of selection for IPO research in 2021. For those who follow Smartkarma's IPO research, this platform provides one of the most extensive, independent IPO related research (especially in Asian markets). <div class="content-highlight">We made 40 investment calls on IPOs this year, of which 34 had positive ratings on the IPOs and 6 had negative ratings. The 36 stocks (with positive ratings) had share price performances that were up 74.5% on average from their IPO prices. The 6 stocks (with negative ratings) had share price performances that were up only 8% on average from their IPO prices. </div>

In this report, we review our IPO investment research in 2020, including the performance of our calls and how we plan to change our process of selection for IPO research in 2021. For those who follow Smartkarma's IPO research, this platform provides one of the most extensive, independent IPO related research (especially in Asian markets). We made 40 investment calls on IPOs this year, of which 34 had positive ratings on the IPOs and 6 had negative ratings. The 36 stocks (with positive ratings) had share price performances that were up 74.5% on average from their IPO prices. The 6 stocks (with negative ratings) had share price performances that were up only 8% on average from their IPO prices. 

Review of Our IPO Research in 2020 & Change in Our IPO Research Process for 2021

Equity Bottom-Up

In December Root shares fell ~22% after insurtech unicorn reported its first quarterly earnings as a public company. As of Q3-20 GAAP net loss reached $85 million and GAAP revenue collapsed to $51 million due to changing of reinsurance structure starting July 2020. During the reported quarter ceded earned premium grew to ~$110 million, 354% YoY growth and was 71% as percentage of direct earned premium while net earned premium significantly fell to $45 million and dropped ~41% YoY. New reinsurance program caused a reduction in GAAP revenue versus prior quarters.In October 2020 Root completed its IPO and received net proceeds of $1.1 billion after deducting offering costs of ~$53 million. Car insurance company priced IPO above range at $27 per share. Now stock is trading around $15 a share and fell ~45% since IPO. We believe that worst-case scenario for Root stock may be priced in and shares have limited downside potential. Consensus estimates for 2021 revenue look pessimistic and assume YoY contraction in revenue. In our insight we will focus on key drivers and catalysts that may support shares and discuss why Root should establish partnership with automaker or EV manufacturer to grow its business and customer base going forward.

In December Root shares fell ~22% after insurtech unicorn reported its first quarterly earnings as a public company. As of Q3-20 GAAP net loss reached $85 million and GAAP revenue collapsed to $51 million due to changing of reinsurance structure starting July 2020. During the reported quarter ceded earned premium grew to ~$110 million, 354% YoY growth and was 71% as percentage of direct earned premium while net earned premium significantly fell to $45 million and dropped ~41% YoY. New reinsurance program caused a reduction in GAAP revenue versus prior quarters.In October 2020 Root completed its IPO and received net proceeds of $1.1 billion after deducting offering costs of ~$53 million. Car insurance company priced IPO above range at $27 per share. Now stock is trading around $15 a share and fell ~45% since IPO. We believe that worst-case scenario for Root stock may be priced in and shares have limited downside potential. Consensus estimates for 2021 revenue look pessimistic and assume YoY contraction in revenue. In our insight we will focus on key drivers and catalysts that may support shares and discuss why Root should establish partnership with automaker or EV manufacturer to grow its business and customer base going forward.

Root Stock Is Showing Signs Of Bottoming Out

In October VC-backed app-based car insurance unicorn Root announced pricing of its IPO and sold ~27 million shares of Class A common stock at IPO price of $27 a share (above its initial target range of $22-25). Columbus insurtech startup raised more than $1 billion dollars and funds affiliated with Dragoneer Investment Group and Silver Lake Technology agreed to purchase an aggregate of up to $500 million worth of shares in private placements. We saw solid demand for Root Insurance IPO. However, Root shares fell ~16% below IPO price and we believe this is a great buying opportunity for long-term investors.Root is a fully licensed insurance carrier with a scaled proprietary telematics solution and operates on fast growing Pay-How-You-Drive (PHYD) segment of insurance telematics market. Under PHYD model driver may control the cost of insurance premium. Furthermore, company offers such products as Root Renters and Root Home cross-selling non-auto products across its customer base. At 14x and 11x forward EV/Revenue on our CY20 and CY21 estimates, which is a significant ~60% discount to its closest publicly listed peer Lemonade, Root valuations look attractive under our base case scenario. If we look at forward adjusted gross profit multiples, Root shares trade at 49x EV/Adj. Gross Profit on our CY21 estimates. This is a modest discount to insurtech peer Lemonade.

In October VC-backed app-based car insurance unicorn Root announced pricing of its IPO and sold ~27 million shares of Class A common stock at IPO price of $27 a share (above its initial target range of $22-25). Columbus insurtech startup raised more than $1 billion dollars and funds affiliated with Dragoneer Investment Group and Silver Lake Technology agreed to purchase an aggregate of up to $500 million worth of shares in private placements. We saw solid demand for Root Insurance IPO. However, Root shares fell ~16% below IPO price and we believe this is a great buying opportunity for long-term investors.Root is a fully licensed insurance carrier with a scaled proprietary telematics solution and operates on fast growing Pay-How-You-Drive (PHYD) segment of insurance telematics market. Under PHYD model driver may control the cost of insurance premium. Furthermore, company offers such products as Root Renters and Root Home cross-selling non-auto products across its customer base. At 14x and 11x forward EV/Revenue on our CY20 and CY21 estimates, which is a significant ~60% discount to its closest publicly listed peer Lemonade, Root valuations look attractive under our base case scenario. If we look at forward adjusted gross profit multiples, Root shares trade at 49x EV/Adj. Gross Profit on our CY21 estimates. This is a modest discount to insurtech peer Lemonade.

Root Insurance. Leader And Innovator In Pay-How-You-Drive (PHYD) Segment

<div class="content-highlight">
<a href="https://www.smartkarma.com/entities/root-inc" target="_blank" data-smartkarma-citation="entities:29692:1" rel="noopener">Root Inc (ROOT US)</a><a href="https://www.businesswire.com/news/home/20201020005703/en/Root-Inc.-Announces-Launch-of-Initial-Public-Offering" target="_blank" rel="noopener">announced</a> its IPO terms and it will offer 24.16 million shares of common shares in the IPO (22 million shares offered by Root and 2.16 million shares sold by a major shareholder). The IPO price is currently expected to be between $22 and $25 per share. However, we expect this IPO to receive a very high demand, and the IPO price range is likely to be raised prior to final pricing. 
We are including Root Inc in our model portfolio.
</div>We forecast the company to generate revenue of $616.1 million in 2020 (up 112.3% YoY) and $1,070.2 million in 2021 (up 73.7% YoY). From 2019 to 2022, we have assumed the company's revenue to increase by 78.9% CAGR. The combination of the company's exploding revenue growth and improvement in the reduction of net losses as a percentage of revenue is very impressive indeed.Our base case valuation for Root is an implied market cap of $13.2 billion, or $52.1 per share, which is 108% higher than the high end of the IPO price range of $25 per share. Given the very high upside, we have a positive view of the Root IPO and we include this stock in our model portfolio.


Root Inc (ROOT US)announced its IPO terms and it will offer 24.16 million shares of common shares in the IPO (22 million shares offered by Root and 2.16 million shares sold by a major shareholder). The IPO price is currently expected to be between $22 and $25 per share. However, we expect this IPO to receive a very high demand, and the IPO price range is likely to be raised prior to final pricing. 
We are including Root Inc in our model portfolio.
We forecast the company to generate revenue of $616.1 million in 2020 (up 112.3% YoY) and $1,070.2 million in 2021 (up 73.7% YoY). From 2019 to 2022, we have assumed the company's revenue to increase by 78.9% CAGR. The combination of the company's exploding revenue growth and improvement in the reduction of net losses as a percentage of revenue is very impressive indeed.Our base case valuation for Root is an implied market cap of $13.2 billion, or $52.1 per share, which is 108% higher than the high end of the IPO price range of $25 per share. Given the very high upside, we have a positive view of the Root IPO and we include this stock in our model portfolio. 

Root Inc IPO Valuation Analysis (Insurtech SaaS)

United States

Root, Inc. of Ohio operates as a technology company in the insurance industry. The Company offers mobile telematics and technology platform to segment individual risk based on complex behavioral data and a customer experience to make pricing decision and grow business. Root serves customers in the United States.

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Root /OH (ROOT US)

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Andrei Zakharov

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