In this episode of Industry Focus: Tech, we’re back on the SEC Form S-1 hunt, this time looking at the books for Olo, a software as a service (SaaS) provider that helps big brand restaurants stand up their digital storefronts and make delivery happen. It’s a high-growth business in a booming market, and it’s surprisingly profitable. We explain why it’ll be near the top of our watch lists once it is public.
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This video was recorded on February 26, 2021.
Dylan Lewis: It’s Friday, February 26th, and we are talking about another Tech S-1. I’m your host, Dylan Lewis, and I’m joined by Fool.com’s original offbeat oddball of obtaining outlier ownership opportunities, Brian Feroldi. Brian, how are you doing?
Brian Feroldi: Dylan, it’s been a few months since we did an S-1 show. I mean, we had them back-to-back-to-back in 2020, so it’s good to be back digging into the weeds again.
Lewis: We created so much work for ourselves that we had to catch up on all the S-1s that we did. That’s kind of the balance, Brian, is looking at the new shiny thing versus buffing the thing that you’ve already paid attention to. [laughs]
Feroldi: Well, IPO markets are open and between IPOs and SPACs and […] there’s still plenty of talk about. I think we have a fun one today.
Lewis: Yeah, this one’s really interesting. I’m glad that you put it on my radar. We’ve spent so much time over the last couple of years, 2020 in particular, Brian, looking at the meal delivery and online ordering space. I think, generally, we’ve looked at that industry and just said, “This is hard. There’s a lot of consolidation. Unit economics aren’t great, and while it’s something consumers love, it’s hard to build a really viable business here.” We might have an asterisk next to that after today’s show.
Feroldi: Yeah, the asterisk there I think is still appropriate, but I agree. I think that consumers clearly are interested in the takeout business, the meal delivery business. Restaurants are clearly interested in that too. As we’ve seen from DoorDash, from Uber, from Grubhub, from Postmates, it’s hard to make that model work. It’ll be interesting to see if the company we’re about to talk about today succeeds.
Lewis: Yeah. Most of the names and probably most of the ways that people are interacting with that space is going to be with the third party logistics businesses, and a lot of the marketplace or platform companies like Uber, like Postmates. What we’re going to be talking about today is Olo, and that’s the business that has the proposed ticker symbol OLO. Interesting name, there’s a little bit of entomology to that. They are similar in a lot of ways, but what they do instead, Brian, is focus more on a restaurant-owned and operated model to delivery, online ordering, and all the things that you’ve come to expect from restaurants since 2020.
Feroldi: Yeah. They are focused on the enterprise. What differentiates this company in my mind is that they’re actually a SaaS company. They’re approaching it from a software model and they’ve primarily focused on enterprise-level restaurants. We’re going to get into that. But this company has already signed up 400 restaurant brands to their name and many of these listeners have ordered from and know. I mean, I’m talking Five Guys, Shake Shack, Chili’s, Wingstop, Applebee’s, Cheesecake Factory, Dairy Cream, Peet’s Coffee, Jamba Juice, Jimmy John’s, Cracker Barrel, and on and on. They have done a fabulous job establishing themselves with these really big name restaurants.
Lewis: Yeah, always good to see large chains as customers when you’re in the SaaS space. We can very quickly get into markets that we think we generally understand but don’t have a good sense of really what are the trade-offs with different providers. Seeing a pretty illustrious list of brands like that is always a good sign. For folks that might have been scratching their heads, as I said, Olo is tied to what the company does in a way. The roots for the name are in shorthand for online ordering, which is a fun little tidbit. I will say Brian, it is a fun logo to see. I think they’re going to have a lot of fun messing around with that and working it into different things on the branding side in the coming years, because it’s very simple, clean, and elegant. O-L-O.
Feroldi: Yeah. This company, again, it’s named Olo, which is short for online ordering. They have been interested in this market for a long time. The company was actually founded in 2005, and the founder is still the CEO. We’re going to get into him later. But the idea was to help restaurants take orders via text messaging. That was their first product vision, where you would take out your phone, you would send a text message to a phone or at a restaurant, the restaurant would get a printout of that order, and then you would fulfill it from there. Over time, the business model has obviously evolved quite a bit. They have since moved into an “on-demand restaurant commerce platform for multi-location restaurants”. They have really focused on the enterprise-level companies, so the really big companies, and boy, have they done a great job. As I mentioned previously, 400 big restaurant brands have joined the platform, and currently, they’ve reached a really significant scale; 64,000 restaurants are on the platform. They’re processing almost two million orders per day, and in 2020, $14.6 billion in gross merchandising volume. Impressive.
Lewis: Yeah. It’s a quaint idea to think of meal delivery by text message in the mid-oz and where we are now, where it’s really table stakes or restaurants to be able to provide this in a seamless and easy way for people, particularly because of stay-at-home. But I think the market would just go in this way in general, Brian.
Feroldi: I think so too. The founder points out in the letter that he basically said when he started the company, he knew that the world is going this way, but he couldn’t have predicted the iPhone. When that came out, it was really a pivotal moment for this company to actually be able to build that functionality directly into their products. They have consistently been able to see around the corner and see where restaurants are going, and boy, have they taken advantage of that.
Lewis: Yeah. A big part of where restaurants are going, 2020 accelerated this, is the idea of digital touchpoints, ease of order, logistics that the customer doesn’t have to think about at all. It just shows up for you. For as much as that’s been on display, I think in the past year, Brian, it is a very small part of the overall restaurant business. I think this is one of those categories that e-commerce has under-penetrated.
Feroldi: It really is. The company’s numbers say that. As of 2019, less than 10% of total restaurant sales were done through digital channels. Obviously, that number has accelerated and grown significantly. But as we pointed out previously, a lot of the restaurants that are on delivery platforms do not own the customer experience. They are reliant on Grubhub, or Uber Eats or whatever, to actually give them the order information. Olo provides those same restaurants with the ability to add delivery options right to their own website, right to their own apps. What’s interesting about this company is it has really taken an open-access approach. Olo isn’t a walled garden. In fact, one of the things they point out is that it integrates with over 100 different software products that are available at restaurants today. So, that could be point-of-sale systems, could be payment processors. It could be on tablets, it could be loyalty programs, all of those speak directly to Olo’s platform, and boy, is that an advantage for the company.
Lewis: Yeah. I think what they offer is really compelling in a lot of different ways. Just think about how scattered the digital presence is for a restaurant. If you use a handful of some of the names that we’ve thrown out there, whether it’s Postmates, DoorDash, Uber Eats, you’re managing orders from a bunch of different places. In some cases, you might have multiple tablet setups that are dedicated for specific use and for that app or that delivery system. What this offers is this ability to centralize all of that and streamline all of it. I think crucially, Brian, what it does is it puts the restaurant in ownership of its digital presence. What we don’t really get into too much with a lot of these apps is their marketplace apps. You’re separating the customer from the restaurant and you’re changing the way that demand would typically flow.
Feroldi: That’s right, and restaurants definitely want to take that power back. I don’t know about you, Dylan, but when I’m thinking about takeout, the first thing my family does is decide what kind of food do you want and where we want to go. We have our local restaurants, and then from there, we go right to the company’s website and we place our order. If we came up with a restaurant that was locally and it didn’t have online ordering, we would skip it. We would just go to the next one, because why would I bother with placing a call, being on hold, and saying everything over the phone when I could just do everything on an app or on the company’s website. That is exactly the kind of thing that Olo enables.
Lewis: Yeah, and I will draw a parallel here, I think with the streaming universe, where it reminds me a little bit of the simplicity of being able to say, “I want to watch that. How do I watch that?” Rather than saying, “I have Netflix, what can I watch?” I think ordering through Uber or ordering through any of these apps, is that approach. Where it’s like, “Is that business on here?” What Olo is trying to do is say, “Oh, I want to order from Mi Cuba Cafe over in Columbia Heights in Washington, DC. How do I do that? How do I make that as easy as possible?” What they’ve been able to do in a very compelling way is to offer a very full suite offering to a restaurant saying, “Hey, we’re going to set you up your digital presence. We’re also going to make the actual logistics and operations of getting that food to customers really easy.”
Feroldi: Yeah, that’s an important point here. Not only can they enable order taking, they can also enable data and analytics. That’s a product offering that they have, as well as what they call dispatch, which is, again, getting the food to you. So not only could you use your own delivery network if you had those drivers on staff, but you can also tap into the existing ones. You can tap into the world of the Uber Eats, and the Postmates, and the DoorDash’s, all in one centralized repository. A really useful product.
Lewis: Yeah, and the focus for them is entirely on that B2B side. They are there to be a help for the restaurants. They are not really interacting on the consumer side, aside from the way that they are helping businesses do that. They’re not creating or aggregating demand in any way like an Uber would.
Feroldi: Yeah, that’s correct. I want to hammer home the importance of the openness of the platform. They are enabling over 100 different technology solutions to be plugged in. That might not sound like a big deal, but the company points out that over 70% of its customers have two to four technology providers just on order collection, and that’s within the existing company. It helps to simplify a company’s own technology platform inside it, let alone aggregating all kinds of different payment systems and loyalty parts. That is something that really glues this company together.
Lewis: Yeah. I think that what we’re going to see over time is that there’s going to be a little bit of resistance to this aggregated marketplace approach. Actually, I’ve watched interviews that CEO Noah Glass, CEO of Olo has done, and he’s liking what’s happening in meal delivery. A little bit to the hospitality and online travel agency dynamic, where early on, hotels were very happy to have the OTAs filling demand for them, because they felt like, “Okay, we’re getting some of our extra capacity filled, this is wonderful.” What slowly happened overtime was loyalty shifted from the hotel to the OTA. It meant that the people are actually supplying the service, supplying the product, and the customer experience was being further and further separated from the customers making those decisions. I see that dynamic playing out here too, Brian, in the mail delivery space where the power right now is really being held with the people who operate the apps like Uber or Postmates and they are able to move demand and they are also able to have different deals in place with restaurants and may or may not offer preferential treatment depending on what those deals look like.
Feroldi: Totally. If you are the producer of something, you want to own your customer experience, and to your point, it did make sense early on when this is a nascent industry to outsource that because it was such a small part of your business and dine-in was with nearly everything. That option allowed you to absorb excess kitchen capacity and generate sales that would otherwise be lost. However, you can go too far in the other direction, as you just pointed out. When I’m traveling, I go to Kayak to start searching. I have absolutely zero brand loyalty to hotels or airlines or all that stuff. I just want the best deal. That’s great for me, the consumer, and it’s great for Kayak. It’s awful if you were the one providing that. Restaurants have seen that play out before and they know that they have to own the consumer experience.
Lewis: For them, I think, in particular, because the industry is just characterized by razor thin margins, any middlemen along the way are going to create problems and a lot of compression, and it’s going to feel like a pinch, particularly for small operators. I think the more you can own that, the more appealing it’s going to be, and I really emphasize this because I think it’s a big selling point for Olo to restaurants. It’s a way to reclaim the digital presence and I don’t know that we’re fully appreciating that right now. I think there’s going to be a lot of different operators in different industries that helped businesses do that and it’s going to be something that will see be very successful.
Feroldi: What’s the thing we always say about things like these, Dylan? It’s like, this sounds great. Prove it.
Lewis: Show me the numbers.
Feroldi: […] the marketplace and actually prove it and as we read the number of big-name companies that they have already signed up in a relatively short period are certainly proving to me, at least provide social proof, that this is a solution that works, so we’ll love to see that.
Lewis: I think when we start to look at the financials, 2020 was an interesting year for a lot of businesses, particularly interesting for companies that operate in these massive growth spaces like we’ve seen, like meal delivery. This is a SaaS business and normally a business that has a ton of subscription revenue coming in. The dynamics switched a little bit in 2020, just because of the sheer amount of merchandise volume that wound up flowing through the platform.
Feroldi: This company generates revenue in three main ways. Two of them we should care about as investors, one of them we shouldn’t. The platform revenue is split between subscription based products, so they charge a per restaurant, per month fee, just to be on the old platform and that was about 57% of platform revenue last year, down from 93% in the prior year. However, they also have a transaction fee, and that is based on their dispatch model, as well as their analytics model. That is based on each transaction they take a fee for and that was 43% of revenue last year, up from 7% in 2018. The final revenue path that they have is professional services revenue for implementation. We’ve seen that with many SaaS companies, where they also have a small revenue component just to get people on board. That is only about 5% or 6% of sales and it’s flexible or margin, so we, as investors shouldn’t pay too much attention to that. It’s really the platform revenue that we care about.
Lewis: Yes, it’s almost like the cost of doing business revenue. You need it because you want to be able to support your clients. But yes, I think their professional services stuff is about 25% gross margins versus what we see over on the platform side of about 85%, Brian, so it’s not great for the overall margin profile of the business, but you need to have it.
Feroldi: But it’s still such a small percentage of the company’s total revenue. It’s not like a company like Appian, that’s like 30% of their revenue. Here, it’s like 5%or 6%. Again, it does affect the margin profile, but not that much.
Lewis: As you might expect, for the space this business operates in, 2020 was a banner year for the company. It was 94% year-over-year revenue growth, bringing them to just under $100 million in revenue for the year, and honestly, that’s just the beginning of the impressive numbers for them, when you’re looking at the income statement, Brian.
Feroldi: Totally. As you pointed out, 94% revenue growth, still under $100 million, so despite all the dominance of those companies we talked about before, not a huge amount of top-line growth. However, the rest of the income statement more than makes up for the seemingly small revenue number. We had a DBN, dollar based net retention rate. Retention, the good one, over 120%, they didn’t give us the exact number, but boy is that a good number in absolute terms. Gross margin for the company consolidated 81%. That was up from 69% in the previous period. Really impressive, given that this company is still sub $100 million in revenue. It gets even more exciting from there though, Dylan. 16% operating margin and $3.1 million in net income. Yes, net income. Dylan, this company is profitable.
Lewis: It’s wild, because I can’t imagine they’re trying to be profitable right now. I don’t think that’s a major priority for management with where they are in their growth stage, and for them to be profitable on less than $100 million revenue, I think is the wildest part to me. It really shows there is a strong business here. We’re seeing that existing customers keep spending with them, and the margin profile is just fantastic.
Feroldi: We’re going to get into the customers in a little bit. But I think one of the big reasons why this company is so profitable is the very nature of its business model. They called this out right in the S-1, “We don’t go door to door, or restaurants to restaurants looking for sales. We knock on corporate headquarters, we go after the customers at that level, and if we win, we sign on thousands of customers all with one transaction.” Amazing to me, what totally jumped off the page here in 2020, their spending on sales and marketing with $8 million to get all those restaurants on there. When you are that efficient with your spending on sales and marketing, I can understand how this company is profitable so fast.
Lewis: It does make you wonder what their expansion plans look like. I think that it’s smart for them to be going after a lot of the really big names. For every large national chain you sign up, you’re dealing with hundreds or possibly thousands of locations versus focusing more on the lower end of the market where there might just be a handful of locations for a mom-and-pop shop. But there could be something why they opened it up and go with something that is workable for smaller scale businesses at some point in the future, and that could be just another growth lever for them.
Feroldi: They’re focus exclusively for now on the enterprise level is both a positive and a negative. As we said, they’re winning, and they are winning without spending much money, so, boy, does that create great financial results. On the flip side, there’s only so many of those companies that you can capture, and once you capture the lion’s share of them, it can become harder to grow. The company has some answers there, but yes, you might be asking yourself, how big is this market opportunity? It’s surprisingly bigger than I thought it was going to be. The company points out that last year, which was a big time down year for the restaurant industry, total sales were still $660 billion. That number is expected to grow to $1 trillion by 2024. Obviously, Olo’s opportunity there is much, much smaller. But they basically said that of the 300,000 or so enterprise restaurants in the United States, that gives them a total addressable market opportunity of about $7 billion. They do have plans over time as they scale to shifts down-market and start focusing on medium-size restaurants and then smaller restaurants. If they make that move, you can expect their sales and marketing spending to go up significantly. But if they can do that, they believe that that will expand their TAM by another $8 billion, so doubled and again, that’s just the United States. What’s interesting here is that this company is for now 100% focused on the U.S., they don’t have any revenue internationally. However, a lot of their customers already have restaurants in international markets, so they do plan on expanding into international markets down the road and they believe that would give them a further $40 billion addressable market opportunity. You add all that up, boy, is that a lot for them to go after.
Lewis: It gets big really fast, and I think they benefit from a couple of things when you’re looking at TAM. One is, even if you just focus on the enterprise restaurant TAM that they’re identifying, that’s $7 billion, their trailing 12-month revenue was $100 million, Brian. [Laughs] There’s just a lot of room to grow even within that. Particularly when you have a solution that is a win-win solution. It seems like a business that really benefits when its customers benefit. I think you could debate whether that’s true for some of the other meal delivery apps and other meal delivery businesses, because the margins are so slim in restaurants. The other thing I’ll add is basically everyone on the inside side of the restaurant industry has deemed Olo the leader in the space. When it comes to software solutions, ordering platforms, we see high praise from restaurant business online, QSR magazine, AP news. It’s always good to see that, because that’s going to travel really fast in a small industry, it’s going to make it a lot easier for people that are exploring these options, but maybe haven’t made commitments yet to take things over. This might be an interesting — but I might be stretching a little bit, Brian, but I see parts of the way Olo business works and what they’re going after with the enterprise side, and it reminds me of the surprisingly big businesses that Shopify supports for e-commerce, and some of those companies could make their own thing, but when you make something out of the box that works so easily, it’s a really appealing solution.
Feroldi: It’s important to remember that their customers are restaurants. They are not necessarily tech experts and they might not have the in-house expertise to build their own custom app and integrate everything together. It does make sense to outsource that stuff the same way that even big tech companies outsource the video conferencing to Zoom, out source to CRM, to Salesforce.com, etc.
Lewis: I think the industry is going this way, it’s worth highlighting, just because it paints a staggering picture of the growth this business has seen. But their annual gross merchandise volume over the past few years, 2013, $50 million, 2014, $100 million, 2016, $500 million, 2018, $2 billion, 2020, $14 billion. It’s not even a hockey stick growth, I think you need another shape for it, Brian. It is massive, and even within the industry for as gaudy as some of the estimates are, I think the company expects about 25% of general orders in the restaurant business to go digital and the online delivery. Even with that, it’s still a tiny, tiny portion of the overall restaurant pie.
Feroldi: That number is not only ridiculously impressive that they have basically more than doubled it every single year since 2013. But yeah, it’s still just a drop in the bucket when compared to the opportunity just within the United States, let alone having success in international markets.
Lewis: Yeah. It’s been huge growth for them on the merchandise volume side, it’s been a huge growth from them as well on the customer side. In 2020, not surprisingly, the businesses that didn’t have a good digital footprint quickly scrambled to set them up. In Olo’s case, they ended the year with 64,000 active customer locations, up from 42,000 a year prior. Huge growth there. This could be one of those businesses where some of that growth is pulled forward, but what we’ve seen with a lot of the data that we get from this company is generally, when they’re being used, customers start seeing pretty solid results and they measure that.
Feroldi: Yeah, they do. One of the things that this company calls out is that they have consistently grown the way that we expect SaaS companies to grow. They get more and more revenue per location per customer. In 2019, they got about $1,100 per revenue per location. Last year, that was up to almost $2,000. Actually, it was $1,760. Let’s be more specific because that sounds like a much bigger jump than I made out to be. [laughs] But more importantly, it just shows that they get their foot in the door with a company and they expand and they expand and they expand. That’s exactly what you want to see if you want to invest in the SaaS business.
Lewis: Yeah. They also have a same store sales or a digital same store sales proxy. It’s an average number, so I think we need to take it with a grain of salt. But for what they track with our customers, digital same store sales grew 44% in 2019, and then 156% in 2020, which is massive growth. Obviously, it’s an average so you’re going to have people on all ends of that, but I think it just highlights that there has been a flood and a big activity switch in, I think, consumer expectations about ordering online and restaurants have really had to make it work. I think this is one of those habits that sticks around after the pandemic.
Feroldi: I absolutely think that that’s going to be the case. They do point out that the way they structure their contracts when a customer signs on board, it’s typically a three year deal that they sign with automatic renewals every year thereafter, and last year, they had a retention rate about I think 99%. Once a company makes a switch and chooses to adopt Olo’s platform, I can see it being very hard for them to give it up.
Lewis: Brian, we don’t know specifically how big this company is going to be. We have to wait for a sense of the valuation. But one thing we can tell is it’s a small business in a lot of ways, $100 million over the past 12 months. With smaller businesses, we say it a lot, the leadership really matters. I think the CEO and the management team at a smaller business generally has a lot more influence over where a company is going. We mentioned before that Noah Glass, the CEO, is the founder and we generally love to see that. There are also some other pretty positive signs when you look at the management team.
Feroldi: Yeah. Danny Meyer, the famous restaurateur, also founder of Shake Shack, boy is he somebody that is super well-respected in the restaurant industry and for good reasons. He actually joined Olo’s Board of Directors several years ago. That is definitely a big boost of confidence for this company and likely one reason why they landed the customers that they have.
Lewis: Yeah. I have to imagine that’s helpful when you’re going out there and you got him helping you negotiate. We see positive Glassdoor signs as well; 93% approval rating of the CEO, 86% of respondents recommending the company to a friend. There’s biases that come with that stuff. But it’s a good presence for them and it’s a good showing.
Feroldi: It’s only 29 ratings. This is still a relatively small sized company, yet another reason why they’re profitable at this stage of the game. Take those Glassdoor numbers with a special grain of salt because there’s less than three dozen ratings on there, but the early numbers that we’ve seen are pretty good. The other thing that we do have on this company, while we don’t know the dilution, number of shares etc., we do know that pre-IPO, Noah Glass owns about 9% of the Class B stock. This is going to be yet another company that comes public with two share classes. Class A, which is the one that you and I would buy, which would get one vote, and Class B, which is going to be controlled by insiders that gets 10 votes. He owns about 9% of the class B. We don’t know what the after IPO shakeout is going to be, but that’s still some decent inside ownership.
Lewis: Yeah. You love to see it, especially for smaller businesses. In a perfect world, you have a motivated founder that takes the company public and sticks around indefinitely, and just continues to grow with the business. We love seeing skin in the game, because incentives are going to be aligned.
Feroldi: Yes, they are. Now, of course, with any company, there are going to be some risks that come along with investing. First off, we don’t know what the valuation is going to be. I could easily see this thing being priced expensive and then popping on the first day. Are we going to get 30 times sales, 40 times sales, 60 or Snowflake-like numbers? I don’t know. Taking that risk off the table, one of the things that you might be wondering, as I was, is how reliant are they on some of their delivery partners? Again, we’ve seen so much consolidation in that industry from the likes of DoorDash and Uber. The company did point out that DoorDash was 19% of its delivery revenue. If consolidation continues there, that will be a concentration risk for investors to watch. The good thing is, I thought with only 400 restaurants, and some of the big names that were on there, that this company would have some serious revenue concentration among its restaurants. They did point out that their top 10 biggest restaurant partners, top 10, accounted for 21% of revenue. That’s way better than I thought it was going to be at this stage of the game. They also point out that they have some reliance on Amazon Web Services. I hate to say it, but they did say that they had “material weakness in our internal control over financial reporting.” We’ve seen a lot of companies have to admit that. It’s good to get that out of the way prior to coming public, but that is a yellow flag for investors to keep in mind.
Lewis: Yeah. I think that of the risks you talked about, Brian, that consolidation in the more logistics side of the business with DoorDash, Uber Eats, Postmates, etc. is one to watch, because it can shift the balance of power when it comes to negotiations. If there are only a couple of providers in that space, if you’re going to lean on third party networks instead of building out your own or having restaurants build out their own, you’re going to have to pay them. There has to be something there and the terms are going to be better and better, the stronger and bigger those third party providers are.
Feroldi: That goes both ways too though, because with Olo having all of these huge name restaurants on one platform, if DoorDash or Uber was to put up a big stink and make some demands, they can say, well, we can seek out alternatives too. Heck, these restaurants definitely have the resources to deliver on their own. But to your point, yes, that is a key stakeholder for investors to keep in mind. If consolidation continues, that could be a long term risk to watch.
Lewis: Yeah. I look at all this, Brian, and I say, even if we give it a gaudy valuation, so say 40 times trailing sales, that puts it right at about $4 billion. Not outrageous, honestly, [laughs] given where the market is and the margin profile for this business, the fact that it’s already profitable and that it has been so effective with its marketing spend. We’re getting directly in the way of it, because we’re talking about it, and getting people excited about it. I hope that because it’s not a too-consumer model, it’s one of those companies that might fly under the radar a little bit [laughs] and maybe have a little bit more reasonable of a valuation than some of the other stuff we’ve seen come public recently.
Feroldi: Yeah. I’ll just say in response: Snowflake. [laughs]
Lewis: Yeah. [laughs] As long as Warren Buffett doesn’t go out there and starts [laughs] buying Olo, we might be all right. That is all to say, for me, I think this one checks a lot of the boxes. Really interesting business, I really like the way the financials are coming together. I think the tailwinds are there for them, and I like that they are taking a different approach to a market that we know is going to have a lot of money flowing into it.
Feroldi: Yeah, totally. Like you just said, boy does this check a lot of boxes for me. High revenue growth? Yeah. Recurring revenue business model? Yeah. Efficient sales cycle? Yeah. Founder in the management team? Yeah. Good Glassdoor ratings? Yeah. Massive TAM, small size, no customer concentration risk. We don’t know what the balance sheet is going to look like, although we do know that pre-IPO the company had, I think it was $78 million in cash, and no debt. They are choosing to go public likely to get their name out there and provide some liquidity. It’s not like they need this capital to fund their business. So yes, this checks a ton of boxes for me. I would absolutely love it if this thing traded at 30 times [laughs] sales or 20 times sales, but I could see myself nibbling on this company very early out of the gate. The big thing that I want to see though that would really make me be really interested in it, is to see some success in international markets. Right now, this is just a U.S. story. While they do have plans to expand it into international markets, that is not something that the company has yet proven, and that is not a given, because they have to find new delivery partners for those markets. We don’t know how ordering will work outside of the U.S., but if they can open up that opportunity, wow, would that make this an interesting stock.
Lewis: Yeah, Brian, we noted that there is the potential for TAM expansion. I don’t know about you, but when I look at that and I try to appropriately discount it, to some extent, I have to fall back on what management has shown me so far. This is a business that’s been private, we haven’t been paying attention to it too much. It’s also only so big. In time, if we see that there is execution on some of the other elements, you trust management’s ability to start growing into adjacent markets, and you can start to figure that number is quite a bit bigger than the $7 billion or so that we started with. That’s going to be my starting figure though.
Feroldi: Yeah, and that’s perfectly fair. I am excited to see this company come public, and if I don’t buy it in the first month, boy am I going to be tracking it closely.
Lewis: Yeah. Me too. I am in exactly the same camp, and excited to have another business to check in on. [laughs] This will be, Brian, circling back to when we started to show, this will be one of the companies that prevents us from talking about an S-1 [laughs] at some point in the future, we will need to check in on [laughs] it.
Feroldi: Fair enough, I definitely want to see how this thing performs out of the gate, and I also want to see what kind of revenue can we expect out of this company in 2021? Yes, their 2020 numbers were fantastic, but talk about having a massive tailwind behind them. Can they keep anywhere close to this kind of revenue growth rate up? I don’t know. I don’t think their growth rates are going to dive, but what’s the normalized growth rate here? 20%, 30%? We don’t know yet.
Lewis: Yeah, this is one of those businesses that firmly […] and be like, you could put a number out there, and I’d believe it. [laughs] If it’s double or triple digit, I believe it. It’s just the difficulty right now of trying to figure out the trajectory of a lot of businesses that have had a lot of growth pulled forward.
Feroldi: It really is, but hey, we’re going to learn soon, because companies are reporting earnings and we’re getting guidance for the year. That will be something to watch.
Lewis: That’s the beauty, they have to tell us four times a year, right, Brian? [laughs]
Feroldi: That’s right.
Lewis: Brian, thanks so much for joining me on today’s show.
Feroldi: Anytime, Dylan.
Lewis: Listeners, that’s going to do it for this episode of Industry Focus. If you have any questions or you want to reach out and say, “Hey,” shoot us an email at email@example.com or tweet us @MFindustryfocus. For more of our stuff, subscribe on iTunes or wherever you get your podcasts. As always, people on the program may own companies discussed on the show and The Motley Fool may have formal recommendations for or against stocks mentioned, so don’t buy or sell anything based solely on what you hear. Thanks to Tim Sparks for his work behind the glass today, and thank you for listening. Until next time, Fool on!
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