Since the early 2000s, many analog business owners have thought about digitalizing their sales management and analysis system for the first time. In parallel, a separate delivery service industry was developing. The restaurant business primarily needed effective analytics of customer orders.
Company Olo Inc., which offers solutions for the digitalization of the restaurant business, submitted an S-1 application on February 19 for an IPO on the NYSE with the ticker “OLO”. Since 2005, during 6 rounds of funding, Olo Inc. raised USD 81.3 million. Let us analyze what is the secret of success, and whether it is worth investing in the securities of this company.
Business Olo Inc.
Olo Inc. Is a SaaS platform (cloud platform) for managing the online business segment. It integrates quickly and easily into the restaurant ecosystem, integrating order management at all stages of customer interaction. The latter, in turn, can place an order at their favorite restaurant on the Olo website, in the application, on third-party marketplaces or on social networks. Thus, the company offers diversification of sources of orders from restaurant customers. Due to the greater reach of the audience, Olo’s customers increase their average sales check.
The platform is divided into 3 parts:
- Ordering – provides direct acceptance of orders.
- Dispatch – selects the most convenient delivery option.
- Rails – Optimizes menu management according to client preference and regional specificity.
Last year, the total value of orders processed by the platform reached USD 14.6 billion. Olo processes about 2 million applications per day. Over 400 restaurant brands (Cracker Barrel, Jamba, The cheesecake factory, Wingstop and others), which include more than 64,000 restaurants, have become clients of the company.
An important advantage of the company is the fact that its users, coming to the platform again, increase their order by an average of 20%. Thus, the retention rate is 120%. Olo operates in the B2B segment, where clients form long-term relationships in the event of successful cooperation.
Of course, it is necessary to note the positive effect of the coronavirus pandemic on the company’s business. In addition to accepting orders, Olo provides restaurants with order analytics, which they use to deliver a more personalized and faster service. This fully meets the needs of the modern consumer, for whom the quality of the provided service is no longer a sufficient selection criterion.
Market and Competitors Olo Inc.
According to a study by the US National Association of Restaurateurs in 2019, visitors to catering establishments spent about 863 billion USD in them (more consumer spending on food). The turnover of the food industry amounted to USD 1.6 billion in 2019. In 2020, total consumer spending in restaurants fell to USD 659 billion. However, according to Freedonia Group, this figure could exceed USD 1.1 trillion by 2024.
The modern consumer expects a personal approach from the restaurant business, as well as the ability to quickly and efficiently receive the necessary service. A bright sign and a good chef may not always bring in enough visitors. Therefore, Olo has practically no competitors in this segment, except for the classic food delivery companies (DoorDash, UberEats and etc.). However, they do not have comparable software, so they cannot be considered full-fledged competitors.
Financial performance of the company
Olo Inc. goes to IPO with strong financial results. At the time of filing, Olo had already recorded a net profit for 2020. The growth rates of its revenue are also impressive.
The total revenue of the company in 2020 amounted to USD 98.42 million, which is 94.16% more than in 2019. In 2019, the relative growth against 2018 was 59.45% (from USD 31.80 million to USD 50.69 million). More than 94% of sales are carried out through the Olo platform, the rest is formed thanks to applications from third-party marketplaces.
Net profit for 2020 amounted to USD 3.06 million, against losses of USD 8.26 million in 2019 and USD 11.54 million in 2018. Gross profit in 2020 amounted to USD 79.76 million, a relative growth of 127.17% compared to 2019. In the event of a further decrease in operating costs, net profit in 2021 could grow by more than 100%.
At the same time, the cost of the company’s services in 2020 increased by 18.22%, which is significantly lower than the revenue growth rate and is a positive signal for the future.
Cash and cash equivalents on the company’s accounts are USD 76.86 million. , which are enough to cover all of its current liabilities (72 million USD). Total liabilities of Olo Inc. reach 75.17 million USD.
Based on the above, we can assert about the high financial stability of the company. Revenue and bottom line are rising, costs are falling and there is enough cash to cover all liabilities.
Strengths and weaknesses of Olo Inc.
Having all the information about the peculiarities of the company’s business, its financial results, we can weigh the advantages and disadvantages of investing in its shares.
To the strengths of Olo Inc. we can attribute:
- The market in which the company operates may reach 1.1 trillion USD by 2024.
- The company is profitable at the time of its IPO.
- There are practically no competitors, there is no analogue in the industry.
- Revenue for 2020 by 94.16%.
- The average revenue growth rate is 76.81%.
- The COVID-19 pandemic has strengthened business.
- The company cooperates with all the leading restaurant chains in the United States.
The risks of investing in this company include the following factors:
- The company has been on the market since 2005, but the net profit was received only in 2020.
- Strong reliance on customers who use her platform. If a cheaper direct analogue appears, the company’s financial results will deteriorate sharply.
- The company does not pay and does not plan to pay dividends.
- Such a high rate of revenue growth will slow down.
IPO details and capitalization estimate of Olo Inc.
Institutional investors in 6 rounds of funding were PayPal Ventures, Tiger Global Management and RRE Ventures. The underwriters of the public offering were Truist Securities, Inc., Stifel, Nicolaus & Company, Incorporated, William Blair & Company, LLC, Goldman Sachs & Co. LLC, JP Morgan Securities LLC, RBC Capital Markets, LLC and Piper Sandler & Co. The bid amount is USD 100 million, but closer to the date of the IPO it is likely to grow.
To assess the potential capitalization of Olo Inc. we use a comparative analysis by the multiplier (ratio) P / S (capitalization / revenue). Public company Big Commerce (BIGC), also develops software in the B2B segment and is traded on the stock exchange with a P / S multiple of 26.15 at the time of this writing. In the market phase of rapid growth, the coefficient reached 40. And this despite the fact that Big Commerce is still unprofitable.
Thus, the potential capitalization of Olo Inc. is 2.57 billion USD (0.98 million * 26.15). Therefore, I recommend adding the securities of this company to your medium-term or long-term investment portfolio.
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