Olo stock is a buy at current levels (NYSE:OLO)
Olo (NYSE:OLO) brings in $597 million in cash to hire new staff as well as develop more software. The company receives good feedback from well-known restaurants and management signs new agreements with established companies. In the best case, Olo will develop more APIs, sign new agreements and acquire other competitors. My DCF model with conservative assumptions resulted in a target price of $50. Of course, I’m a buyer at the current price.
Olo: scalable technology and great satisfied customers
New York-based B2B SaaS company Olo is a leading on-demand commerce platform empowering the restaurant industry’s digital transformation.
The company promotes itself as the most reliable CNC motor on the market. The company’s systems are capable of processing thousands of orders per minute during peak periods, and offer scalable technology:
With previous technology capabilities, it only makes sense that large customers in the United States are working with Olo. If you have already received an order from Five Guys, Subway or Denny’s, it is likely that Olo has fulfilled your order:
The company not only works with some of the largest restaurant chains in North America, but it also works with many small, medium and large restaurants.
Customer feedback is extremely beneficial. I cannot detail all the results obtained in each restaurant, so let’s note the most relevant results. Five Guys claimed to have achieved a 25% higher average order size through the company’s software integration:
Additionally, Cold Stone Creamery reported a significant increase in the number of customers who would be willing to use Olo’s platform again:
Thanks to excellent results and working with large customers, market estimates are quite optimistic about Olo
Olo has received a lot of attention from investment analysts thanks to the results posted by some clients. Most members of the investment community expect double-digit growth and a double EBITDA margin over the next two years. Market estimates predict average sales growth of nearly 36% in 2022 and 2023. Furthermore, the EBITDA margin and FCF/Sales would remain at 13% and 11% respectively.
Take a look at the figures provided by other analysts. Take into account that my numbers are not far from their numbers:
Basic scenario: integration with third-party delivery service partners and new APIs
I believe the company has many options to increase the number of customers and its operational scale. Most interesting is the integration with third-party DSPs on a single software platform. As a result, I expect a significant FCF margin increase and revenue growth:
Integrate with a nationwide network of third-party DSPs that are operationalized together on a single software platform, in some cases offering up to eight different delivery providers per market and covering 97% of our customers’ stores in the United States. Source: Prospectus
I also believe that further development of the company’s APIs and webhooks will help customers increase automation. Think about it. Most restaurants typically perform many repetitive tasks on a daily basis. If Olo can help business owners develop algorithms that reduce costs and simplify processes, revenue could increase:
We have published a POS API and Loyalty API standard which has been adopted by many POS and Loyalty providers respectively. We use both cloud-based APIs and, where needed, legacy in-store agent-based technologies. The in-store agent software uses our proprietary real-time protocol, which can work over low-bandwidth connections and does not require restaurants to open inbound firewall ports. Source: Prospectus
With an 11% growth in the global software as a service market, in this scenario, sales growth would be 29% to 26% in 2022-2024 and 11% from 2025 to 2032:
Valuates reports indicates that the global Software as a Service market size is expected to reach $307.3 billion by 2026, from $158.2 billion in 2020, at a CAGR of 11.7% during the period 2020-2026. Source: Software as a Service ((SaaS)) Market Size is Expected to Reach $307 Billion by 2026
If we also use an EBITDA margin of 14%, which is close to the margins reported in 2022 and 2025, the 2032 EBIAT would remain at $57 – $67 million:
With D&A of approximately $10-23 million, D&A/Sales of 2.93%, and capital expenditures of $4.6-1.86 million, FCF remains between $24-70 million. Note that my FCF margin is quite conservative at 7%-9%:
If we assume a WACC of 7.5%, the net present value of FCF would remain at $262 million. I also used an exit multiple of 21x, which implied a market cap of $1.32 billion and a fair price of $23.26:
Best case scenario: more acquisitions and successful M&A integration
I’m pretty optimistic about Wisely’s latest acquisition. In my opinion, if the integration of the merger with Wisely Inc. is done well, we could expect revenue growth through synergies. But that’s not all. If management is successful, we could see much more inorganic growth, which would imply significant sales growth.
Olo Inc. announced today that on November 4, 2021, it completed the acquisition of Wisely Inc., a leading customer intelligence platform that enables restaurant brands to personalize the customer experience to maximize the customer lifetime value. Source: Olo – Olo finalizes the acquisition of Wisely Inc.
I also believe that the partnership with Uber (NYSE: UBER) brings more breadth. I think Uber recognized Olo’s technologies, which would provide significant brand awareness. In my opinion, large companies will be willing to work with Olo:
The deal follows Uber Eats’ 2019 integration into Olo’s Rails platform and its 2020 acquisition of Postmates, which resulted in a significantly expanded combined courier base to serve the most popular restaurants. prosperous in the country. The new integration enables Olo’s restaurant partners to expand their drop-delivery capabilities and prepare to tap into the growing alcohol delivery space, while optimizing price, lead times and quality of service through the network technology from Uber. Source: Olo – Olo extends its partnership with Uber
In this particular scenario, I assumed sales growth of 25% to 20%, EBITDA margin of 15%, and capital expenditures/sales of 0.65% to 0.6%. The results include an FCF of nearly $20 million to $175 million.
If Olo reports previous financial numbers, I think most investors will carefully study the business model. As a result, demand for the stock may increase, which would cause volatility to decrease. Given these beneficial factors, using a WACC of 6.05% would make sense. In short, the fair price would remain close to $50:
Olo has cash to fund its R&D efforts as well as to increase its marketing efforts
As of September 30, 2021, Olo reported $597 million in cash and an asset/liability ratio close to 10x. In my opinion, the management has sufficient liquidity to invest in R&D, develop new APIs and sign new partnerships with large companies:
I also really appreciate that the company reports unearned income worth $2 million and no financial debt. This means that customers pay in advance and finance the operations of the company:
Risks related to rapid growth and lack of partnerships
Olo is growing very quickly, which carries some risks. The company is working with more and more customers and they expect Olo’s technology to work successfully. In my opinion, Olo will have to hire a lot of staff to meet the demand for its products. Moreover, the company’s systems will have to be more sophisticated because the amount of data has increased considerably. If a few commands fail for any reason, or data management fails, Olo’s brand reputation could be damaged. As a result, sales growth could be lower than expected:
Any problems with data transmission or storage and increased demands could harm our brand or reputation. Additionally, as our business grows, we will need to devote additional resources to improving our operational infrastructure and continue to improve its scalability to maintain the performance of our platform, including improving or expanding the cloud infrastructure. . Source: Prospectus
If management can’t sign new deals with partners like payment processors, digital agencies, or DSPs, I think sales growth could decline. In addition, existing partners may decide to negotiate their agreements, which could result in reduced FCF margins for the company. As a result, I would expect a decline in the fair valuation of the company:
The success of our platform depends, in part, on our ability to integrate applications, software and other offerings from third parties into our platform. We anticipate that the growth of our business will continue to depend on relationships with third parties, including relationships with our point of sale, or point of sale, systems, DSPs, aggregators, digital agencies, payment processors, loyalty providers and others partners. Source: Prospectus
To take with
With $597 million in cash, Olo has enough resources to invest in new modules and pay more sales staff. Therefore, I would expect more technology, APIs and new partnerships. If management continues to acquire other competitors, Olo will experience even greater sales growth. Under the best conditions, in my opinion, the company’s stock price could even reach $50. Yes, I see some risk from rapid growth and technological challenges, but I’m a buyer at the current price. The expected free cash flow justifies a higher valuation.