The Big Idea
A weird quirk of the auto insurance market is that different insurance carriers have great rates for certain types of people in certain states, and horrible ones for others.
If you’re not in the target group in your area you might be getting a raw deal.
But with so many insurance companies out there, getting apples-to-apples comparisons on pricing and coverage options is a pain in the neck.
This leads many consumers to just stick with what they have – even though they could be burning cash every month.
On the flip side, insurance companies have myriad challenges of their own.
Their strategies (growth, cash preservation, etc.) shift with the economy and with loss ratio trends. Depending on the situation, they try to attract certain types of customers. And at times it can be challenging to efficiently target advertising dollars.
These challenges – for both consumers and insurance carriers – are why insurance comparison and referral websites sprung up.
These online platforms pull in consumers and collect data, then point them in the direction of carriers that should be a good product match and offer decent pricing.
Insurance carriers and agents pay the platform companies commissions, and in some cases even subsidies, in exchange for leads and data.
In a stable market, it’s generally a win-win. Sure, consumers may need to deal with some annoying emails and phone calls from insurance agents after entering their info. But at the end of the day, motivated buyers tend to do well, and so do carriers.
Here’s the thing about the auto insurance market right now, and part of why we’re stepping into it.
For the last couple of years, the auto insurance market has been a mess.
The prices of cars shot up, as did the costs to repair banged-up cars, not to mention banged-up drivers and passengers.
Since it can take months or years to get rate increases approved, insurance premiums lagged behind the rising costs of claims. Insurance companies, which are somewhat slow to adjust, don’t do well in fast-moving markets.
So they pulled back, dramatically slowing spend on customer acquisition and new policy growth. That was very bad for insurance marketplace companies.
There are signs things are changing, however.
A recent S&P report says the top 10 auto insurers have won approval to boost auto insurance rates by more than 20%.
Last week, both Travelers (TRV) and Progressive (PGR) shares hit record highs, propelled by booming profits.
On its Q2 conference call last November, management at Progressive, one of the biggest auto insurance carriers out there, talked about returning to growth mode.
The company tends to book most policy growth in the first half of the year.
That sets up a compelling backdrop for online insurance marketplaces. In fact, most of those stocks also jumped last week, following insurance stocks higher.
Today, we’re stepping into one of the smallest insurance marketplace companies out there. It’s a name we’ve owned before and we did very well in, making a gain of 165% on our position by the time we sold it all.
I can’t guarantee that level of repeat performance. But the potential is certainly there.
The Company
EverQuote (EVER) offers an online shopping marketplace where consumers can compare and buy property and casualty (P&C) insurance policies.
Auto insurance is by far the largest vertical, representing almost 80% of revenue. Home & renters insurance makes up most of the balance. EverQuote exited the health insurance market last August to refocus on its core markets, a good move in my view.
The company was started in 2011, went public in 2018 and now has a market cap just under $450 million. It plays in a large, fragmented market where roughly $170 billion is spent on insurance advertising and commissions every year, yet only $10 billion is spent on digital advertising.
EverQuote is working to change that and bring insurance shopping into the digital age, much like what has been done in the travel, hotel, home sharing and car rental markets.
Management’s vision is to become the largest online source of insurance policies by using data, technology and knowledgeable advisors to make insurance simpler, more affordable and personalized, ultimately reducing cost and risk.
It appears to be succeeding. Over two million shoppers request a quote from EverQuote each month. The company has collected over 2.5 billion consumer-submitted data points since it began doing business.
While progress has been made, we’re likely still early in the shift to online insurance shopping. And we’re also coming off a horrendous couple of years for the industry, and for EverQuote.
As costs to repair cars went up in 2022 and 2023 insurance carriers got squeezed and pulled back on advertising spend. Now, the market appears to be moving back into growth mode, with 2024 widely believed to be a major recovery year.
That means the biggest carriers EverQuote works with, including Progressive, Allstate (ALL), American Family Insurance, Farmers, Liberty Mutual, Nationwide, State Farm and USAA, should start to spend more with the company.
The Platform & Solutions
EverQuote’s platform is all about data science.
It’s built on proprietary algorithms that are designed to efficiently pull in consumers, match them with the best insurance providers, and generate valuable referrals that insurance carriers and agents will pay for.
Consumers typically come to EverQuote through its website (www.everquote.com), though phone calls and other channels play a lesser role. From there the company collects data, which is then sent out to its network of carriers and agents.
Behind the scenes, insurance carriers and agents use their own technologies (sometimes EverQuote PRO) to participate in an auction that matches consumers with carriers based on referral bid price, consumer profile and other factors.
Consumers are then handed off to carriers and/or agents to purchase the desired insurance policy, either online or offline.
The image below, from EverQuote’s investor slide deck, shows the typical customer journey from when they come into the company’s orbit to when they engage with an insurance carrier and/or agent.
EverQuote’s platform currently features most of the biggest insurance carriers out there and roughly 8,000 agents. The two largest customers (32% of revenue at the end of 2022 and 21% at the end of Q3 2023) are Progressive and State Farm.
Growth Initiatives
Restructuring: In 2019, EverQuote jumped into the health insurance market, which turned out to not be the best idea (lots of costs, not a core strength). The decision to exit the health insurance vertical was made last June, and in August the company sold the business for $13.2 million in cash. It also laid off 175 people (28% of the workforce). This restructuring brought in some cash, should save around $20 million annualized and means EverQuote is leaner and meaner, refocused on its core markets of auto, home & renters insurance.
Focus on Efficiency: Management’s renewed focus on its core markets and being capital efficient is driving Variable Marketing Margin (VMM) higher. This is being accomplished by using technology and data to become more selective with respect to customers, and a greater mix of local agents. VMM hit a record high in Q2 and remained near record highs in Q3. There might not be a lot more upside to VMM from here, but maintaining it in the mid-35% range should drive impressive earnings growth.
Auto Insurance Market Recovery: EverQuote is poised and ready to take advantage of opportunities that arise as/if the auto insurance industry recovers from a very tough couple of years. On the Q3 call in early November, management said they (and other industry professionals) see the auto insurance recovery stepping up in Q1 2024 and gradually recovering through the year and into 2025. Eight or nine of the company’s top 10 customers have talked about plans to grow in 2024.
Grow Base of Agents: EverQuote has roughly 8,000 insurance agents on its platform. With roughly 100,000 agents out there, the opportunity to grow the agent base is significant.
Home & Renters Insurance: While a smaller chunk of the overall business than auto, this vertical is growing nicely and EverQuote now has a dedicated team.
The Business Model
EverQuote generates revenue by selling consumer referrals to insurance provider customers (carriers, agents, indirect distributors) and by earning commission fees paid by insurance providers. The company builds its user base mainly via online advertising. It’s a fairly efficient business, without a lot of overhead. This is part of why the stock can do very well when the insurance market is strong.
The Bottom Line
EverQuote can be a bit of a boom-or-bust type business depending on how the auto insurance market is doing. Given how tough the last few years were, recent results are poor, and next year’s comparisons look rougher than they should be because the health insurance business (roughly 8% of trailing nine months revenue) was just sold. Looking out later in 2024 and into 2025, the numbers should be a lot better.
Over the last nine months, revenue has fallen 26.5% to $232.2 million while EPS loss has increased from -$0.51 to -$1.35. Automotive is down 29% to $182.5 million while Home & Renters is up 23% to $31.1 million. Revenue in the Other segment (mostly health care, which EverQuote exited in August) has fallen by 44% to $18.6 million. Variable Marketing Margin (VMM), which is revenue less total advertising costs and shows how efficient EverQuote’s advertising and customer acquisition activities are, was $79.6 million (34.3% of revenue).
In Q3 2023 (reported November 6), EverQuote delivered revenue of $55 million (-47%), slightly beating expectations (by $2.7 million). Adjusted EPS was -$0.87, $0.08 worse than expected and down from -$0.20 in the year-ago quarter. Revenue from Automotive (78% of total revenue) was down 51% to $43.1 million and revenue from Home and Renters (20% of total revenue) was up 51% to $10.9 million (a bright spot). Revenue from Other (i.e. health) was down 87% to just over $1 million, reflecting the August exit from the segment. Q3 VMM was $19.4 million (35.2% of revenue), much higher than the 30.8% of Q3 2022 and close to a record high.
EverQuote ended Q3 with $39 million in cash and equivalents ($13 million came from the health insurance asset sale), no long-term debt and nothing drawn on its $25 million line of credit.
Accounting for the removal of the health insurance business, Q4 2023 revenue is expected to be $50 million (-44%) and EPS is seen around -$0.32. That would mean 2023 revenue will fall about 30%.
Looking into Q1 2024, this should be the last quarter of significant negative revenue (-40% expected, partly because Q1 2023 was a big quarter for the largest customers) before things level off in Q2 and begin to grow from there (Q3 and Q4 expected to grow 30% to 40%). That implies total 2024 revenue will be about flat vs. 2023. EPS loss in 2024 should be roughly cut in half (-$0.80 is current consensus).
Solid, double-digit revenue growth of around 25% should return in 2025.
Risk
- Online growth in insurance purchasing may not materialize.
- Insurance carriers and agents may pull back, thereby reducing commissions/subsidies.
- Potentially volatile, thinly traded micro-cap stock with market cap under $500 million
- Reliance on two carriers that made up 31% of revenue at the end of September and 48% of total accounts and commissions receivable.
Competition
LendingTree (TREE), MediaAlpha (MAX), QuinStreet (QNST), NerdWallet (NRDS), social media platforms, brand advertisers/agencies, individual insurance provider websites.
The Stock
Trading Volume: EVER trades an average of 325,000 shares a day, equal to roughly $4.3 million.
Historical Price: EVER went public at 18 in June 2018 and traded down to 4 near the end of that year. Shares took off on a multi-year run from there, ultimately trading into the low 60s in mid-2020. The bottom began to fall out in the middle of 2021 and by October 2022 EVER was below 6. A second-half-of-the-year rally carried the stock into the high teens, but the expected 2023 auto insurance recovery didn’t happen, sending the stock back near the 2022 lows. EVER built a base in the 5.5 – 8.5 range between last June and last November. As auto insurers started talking about returning to growth, EVER began to climb. The stock peaked near 13.2 just before the end of 2023. A dip to the 200-day line in the low 10s in early January set shares up for a quick rally back to 13.2, where EVER closed out last week. Shares have pulled back to just below 13 since.
Valuation: EVER trades with an EV/Forward Revenue multiple of about 1.4. For reference, when the stock was really cooking back in 2020 this multiple hit 4.5.
Buy Range: Expect to buy EVER in the 11 – 14.5 range in the next couple of weeks.
The Next Event: Q4 2023 earnings expected around February 26.
Current Recommendations
| Ticker | Stock Name | Date Bought | Price Bought | 1/31/24 | Profit | Rating |
| ATEC | Alphatec | 4/10/23 | 15.7 | 16.6 | 6% | Buy |
| BRZE | Braze | 8/3/23 | 42.3 | 55.3 | 31% | Hold |
| DCBO | Docebo | 12/7/23 | 44.6 | 45.3 | 1% | Buy |
| ENVX | Enovix | 10/6/22 | 20.4 | 9.7 | -52% | Buy |
| EVER | EverQuote | 2/1/24 | NEW | 12.8 | NEW | Buy |
| INTA | Intapp | 1/4/23 | 25.7 | 44.8 | 75% | Buy |
| LQDT | Liquidity Services | 11/2/23 | 19.2 | 17.7 | -8% | Buy |
| RELY | Remitly Global | 9/7/23 | 24.7 | 17.1 | -31% | Hold Half |
| TMDX | TransMedics Group | 7/7/22 | 34.1 | 87.7 | 157% | Sold 3/4, Hold 1/4 |
| WEAV | Weave Communications | 1/4/24 | 11.3 | 13.1 | 16% | Buy A Half |
Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.
Glossary
Buy means accumulate shares at or around the current price.
Hold means just that; hold what you have. Don’t buy, or sell, shares.
Sell means the original reasons for buying the stock no longer apply, and I recommend exiting the position.
Sell a Half means it’s time to take partial profits. Sell half (or whatever portion feels right to you) to lock in a gain, and hold on to the rest until another ratings change is issued.
Disclosure: Tyler Laundon owns shares in one or more of the stocks mentioned. He will only buy shares after he has shared his recommendation with Cabot Small-Cap Confidential members and will follow his rating guidelines.
The next Cabot Small-Cap Confidential issue is scheduled for
March 7, 2024.
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