In the closing days of 2020, when many people were focused on preparing for the holidays, a small software company went public through a SPAC IPO. The event occurred on December 23.
Part customer relationship management (CRM) platform, part lead generation and marketing platform, the company’s software helps home services companies grow and manage their businesses, and it streamlines the move-in and post-move journey for homeowners.
The stock represents a compelling way for investors to gain exposure to evolving consumer and business trends related to the housing market and home services, especially home inspection, moving, insurance and utility services. After a pandemic-affected 2020 growth could top 60% in 2021, then remain well above 30% for the foreseeable future.
All the details are inside. Enjoy!
Cabot Small Cap Confidential 260
The Big Idea
In 2012 Matt Ehrlichman, who had just sold his start-up technology company Thriva to Active Network for $60 million, was moving his family into their newly built home and dealing with all the hassles home construction and moving required. He thought there must be a better way to streamline all the stages of this journey than the piecemeal approach he was experiencing.
A year later he co-founded Porch Group. The company started out as a consumer-oriented home services marketplace that connected homeowners with contractors and other professionals. The idea was that, similar to Angie’s List (ANGI) and HomeAdvisor, Porch could ease the burden for consumers by putting them in touch with those that could help.
It was a good idea and got the company off and running. Porch soon had over 500 employees and a flush bank account. But the founders realized the original concept was only going to get the company so far in a crowded and fragmented consumer market.
In 2015 Porch made the tough decision to change its business model from a focus on consumers to one on businesses and consumers. The revised business-to-business-to-consumer (B2B2C) model opened the door to work with commercial clients, including inspectors and movers.
These service providers are strategically important for reaching homeowners at critical moments in their journey when people are most receptive to offers for moving and other home services.
The pivot laid the foundation for Porch to grow into a much more significant company and better address today’s $220 billion market for home services, which is comprised of inspections, moving, security, TV/internet, P&C Insurance and contractor services.
The company is now the leading U.S. provider of ERP/CRM software for home inspectors and movers, which use the company’s software and lead generation platform to better manage their businesses and reach consumers.
Growth stalled in 2020 due to the pandemic, but revenue grew tenfold between 2017 and 2019, and is likely to be up over 60% in 2021. Investors can now buy this stock after a recent merger with PropTech Acquistion Corporation, which culminated in a SPAC IPO on December 24, 2020.
In short, Porch Group (PRCH) represents a compelling growth story that’s still unknown, making it a good fit for our portfolio at a time when remote work trends and a wave of relocations to suburban and small towns is driving a strong housing market across the country.
Porch Group (PRCH) is a business-to-business-to-consumer (B2B2C) software company that offers a proprietary ERP/CRM platform to home services companies in the U.S. It also offers home services comparison and booking tools for consumers. Porch has a market cap of $1 billion.
Porch provides its software and services to roughly 11,000 home services customers spanning the home inspection, moving, utilities, warranty and real estate industries. They rely on Porch’s platform to grow their businesses, improve operations, manage employees, track partners and deliver better customer experiences.
The company’s most well-known brands include market-leading software solutions for inspectors (Inspection Support Network) and movers (Hire A Helper). These offerings, which service providers either pay subscription fees for or get for free in exchange for sharing consumer data (the customer access pricing model), give Porch proprietary access to over 65% (and growing) of all U.S. homebuyers.
Additionally, Porch’s marketing and customer acquisition platform affords access to 27% of homebuyers, who use various Porch websites to answer questions about home projects. Via these websites, users connect with a Porch Home Assistant who matches them with Porch Pro Network service providers across moving, TV/internet/security, insurance, and contractor markets.
In some cases, new homebuyers are paired directly with a Porch Moving Concierge through their home inspection company, if it has opted into the customer access pricing model. Similar to the Porch Home Assistant, the Moving Concierge rep links homebuyers with moving and other home services offered by Porch clients. Notably, the lead gen/customer access pricing model generates roughly six times higher revenue per consumer than the SaaS model, and is growing faster. More on that in a minute.
A key part of the Porch growth story is that, through its home inspection offerings, Porch has the rare opportunity to reach buyers and sellers at the time an inspection is done, which is usually around six weeks before people move. This is a key moment in a buyer’s/seller’s journey since it is when they are most open to the home services performed by Porch’s customers.
This early access is a major competitive advantage. Porch gains access well ahead of the competition, which are reliant on change of address forms filed with the U.S. post office. Those typically come many weeks after an inspection is done.
Not surprisingly, Porch is currently focused on growing its business through high-value services that are needed just before and after move-in. These including home inspections, moving and insurance. Management will likely branch out over time but right now that’s where the money is.
Porch Group came public on December 24 when it merged with Proptech Acquisition Corporation. When the dust settled the company should have around $200 million in cash on the balance sheet, which is expected to be used for operations and to support M&A.
Significant ownership is comprised of founders and employees and institutional ownership from Valor Equity, Keller Williams, California Association of Realtors and Cinch.
Products & Platform
Porch’s platform operates as a full EPR/CRM for home services clients as well as a lead gen/marketing/customer acquisition platform aimed at pulling in consumers.
From the perspective of a home services provider, it includes dashboards for online booking, payment processing, contract management, scheduling, dispatch and routing optimization, communications (email, text, etc.), customer CRM, industry integrations, reporting and more. Customer retention is high (134% between 2018 and 2019) due to the day-to-day integration of product offerings.
From a consumer perspective, Porch’s platform (through various websites) provides comparisons for key services that consumers need, including insurance, moving, security, TV/internet, and contractor services.
Porch’s platform generates revenue both through traditional SaaS fees, paid by home services companies, as well as through its customer access pricing model.
In the SaaS model, home services companies pay Porch for use of its software and services. This is a typical provider-client relationship for a software company.
In the lead gen model, home services companies (mainly inspectors) use Porch’s software for free in exchange for introducing Porch’s Moving Concierge service to end consumers. Porch is then able to offer services directly to those consumers, which pushes business back to Porch clients.
This lead gen/customer access model is a valuable marketing tool and customer acquisition platform for home service providers. Notably, the lead gen/customer access pricing model generates roughly six times higher revenue per consumer than the SaaS model, and is growing faster.
To summarize, because of its hybrid business model Porch caters to three types of customers:
(1) Home services companies, including inspectors and movers, who use Porch’s software and services to manage their businesses and gain introductions to homeowners and homebuyers.
(2) Consumers (homeowners and homebuyers), who use Porch’s solutions for comparison shopping.
(3) Service providers (insurance, security, TV, Internet, home repair & improvement, etc.) who pay Porch commissions for new customer sign-ups.
By offering solutions to these three groups of users Porch’s platform creates a value-generating flywheel.
Home services companies use Porch’s platform to operate their businesses and attract customers. Their use of the platform connects consumers with Porch’s Moving Concierge services, which in turn drives increased demand for home services offered by companies working with Porch Group.
Here are a few details on Porch’s leading brands:
Inspection Support Network (ISN)
Inspection Support Network (ISN) is Porch’s biggest brand and is the #1 inspection software solution in the U.S. It was acquired in 2017 and offers a portfolio of easy-to-use CRM tools that help inspection companies manage their business, streamlining operations, automate workflows and manage customer and agent relationships. High value features include billing, scheduling, online booking and reporting. Roughly 26% of all home inspections are managed through ISN, which has a Net Promoter Score of 73. A key component of ISN is that clients can opt into the pay by customer access model, which is Porch’s Moving Concierge service. ISN revenue has grown from roughly $5 million at the time of acquisition to an estimated $20 million in 2020.
The HireAHelper moving platform (acquired in 2018) helps moving companies manage all aspect of their business and find new customers. It is the largest mover labor platform in the U.S. and is used by PODS, Budget and PackRat. From a consumer perspective, HireAHelper is an online comparison and booking marketplace that helps people figure out what moving company they want to use and to book professional movers to pack, load and transport their belongings. HireAHelper revenue has grown from roughly $10 million at time of acquisition to an estimated $20 million in 2020, with full service product offerings (movers, truck, etc.) growing the fastest.
Kandela (acquired in 2019) is a website-based moving concierge product that helps people move into a new home. Kandela is partnered with home services providers across internet, TV and security markets and will help customers find the best services available in their new location, work our service packages, prices, activation, installation, etc. Utilities serving over 12 million households have partnered with Kandela.
Elite Insurance Group
Elite Insurance Group is Porch’s insurance broker and is licensed in all 50 states. It helps consumers compare quotes from top insurance companies, including Travelers, Nationwide and Progressive, using online technologies so they can select a policy for their needs and budget.
M&A: Management, which has deep M&A experience, sees dozens of potential acquisition targets that can supplement its expected 30% average annual organic growth rate. With roughly $200 million in cash, Porch wants to execute around four acquisitions over the coming twelve months. It is carrying on discussions with around 20 potential acquisition targets. Expect the company to focus on insurance, moving, home services SaaS and home technology markets.
Capture Larger Share of Homebuyer Revenue: If Porch is able to move all customers to the lead gen/customer access pricing model it will be generating around $25 per homebuyer. That would represent significant growth over where Porch is today, but industry analysts say there is roughly $2,300 of homebuyer revenue available. That means Porch is only capturing 1% of the total value out there. Clearly, it won’t ever get it all, but the point is there is ample room to grow.
Insurance Expansion: Elite Insurance Group is Porch’s current insurance broker, but management plans to expand it into an MGA (managing general agent) through acquisition. This would mean Porch can capitalize on insurance policy underwriting advantages that it has through its proprietary insights into properties and homebuyers, while earning higher commissions. Negotiations with a potential target company are ongoing.
Grow Lead Gen/Customer Access Pricing Model: Roughly 60% of customers are currently paying SaaS fees, which works out to roughly $4 per home inspection, while the other 40% are paying via the lead gen/customer access pricing model, which works out to around $25 per customer (six times more). Naturally, Porch wants to build the customer access pricing business as it generates higher revenue. It appears to be making progress – over 75% of new customers are choosing the customer access model.
The Business Model
Porch generates revenue through both traditional SaaS fees for different brand/services as well as a lead generation/customer access pricing model. Because of its hybrid business model Porch’s primary revenue drivers are the number of companies it provides software to, average revenue per account, monetized services (per quarter) and revenue per monetized service (per quarter).
The Bottom Line
Porch Group grew revenue by 43% to $77.6 million in 2019, which ended with 10,585 customers (up 20%) and $444 in revenue per account (monthly, up 29%). Things got off to strong start in 2020 but, not surprisingly, the pandemic put a dent in Q2. Third-quarter results rebounded nicely with revenue at $21.5 million, customer count at 10,792 and average revenue per client at $664 (up 20%).
Given the trends, and accounting for the seasonally slow Q4, it looks like 2020 revenue should be slightly down (by around 5%) to $73 million this year and Porch will end the year with just shy of 11,000 customers generating average revenue of about $600 per month. EPS loss should be around -$0.50.
Looking forward, it is possible Porch could grow revenue north of 60% in 2021, to $120 million, without any acquisitions (which would be additive to that). Even with an expected increase in operating expenses, greater scale could cut the EPS loss in half, to around -$0.25. I fully expect organic growth of over 30% in 2022, when the company could come close to breaking even. However, given management’s statements and clear penchant for M&A investors should expect material acquisitions over the next two years.
Post IPO Porch Group should have around $200 million in cash on the balance sheet.
Reliance on Housing Market: Porch’s growth is directly tied to the volume of home sales and new home builds since these drive inspections, moves and related services. Should the housing market falter growth could slow.
Recent IPO Risk: IPOs and SPAC IPOs have been hot. If investor sentiment toward these stocks cools shares of PRCH could be volatile based on little more than shifting investor preferences.
Acquisition Risk: Porch Group’s growth strategy is partially reliant on M&A. If no good targets are identified, if pricing is wrong, or if integration is done poorly, the growth story could be challenged.
Consumer Data Access: Porch’s customer access pricing model is a major part of the growth story and relies on access to consumer data. If such access is limited through regulations or partners the company’s business model may need to be tweaked.
Litigation With Kandela: In May 2020 the owners of Kandela filed a breach of contract lawsuit against Porch related to their earnout agreement. It’s likely this was driven by the pandemic but at this time the litigation is still ongoing and poses some risk related to that relationship and the future of the Kandela brand.
There is a lot of competition within the home services and related industries where players of all shapes and sizes vie for lead generation, subscription and pay-for-services revenue. Porch plays in the rather large sandbox with others that provide online home services marketplaces, search engines for locating home services companies, insurance comparison websites and home utility comparison websites. The most direct competitors are focused on reaching consumers for the purpose of helping with high-value services, including insurance, moving, TV/internet, etc.
Trading Volume: PRCH’s trading volume is quite variable given the newness of the stock. Average volume, from before and after the merger (when PRCH traded as PTAC), is around 1 million shares daily, and PRCH has averaged near that level over the last ten days. I expect things will settle down to average trading volume near 500,000 shares daily over the coming months.
Historical Price: PTAC was the ticker symbol of the SPAC that Porch Group merged into on December 23. After that Porch Group’s ticker symbol became PRCH. Before merging PTAC mostly traded between 10 and 11, then jumped above 12 in the weeks just prior deal closing. Directly after the merger PTAC jumped to 14, then traded up to an intra-day high of 17.3 on December 28. The shares have traded lower every day since and are now roughly 23% off that all-time intraday high. This trend isn’t surprising, and I fully expect PRCH to be somewhat volatile in the coming months as the stock ages and investors become more familiar with the story.
Valuation & Projected Price Target: PRCH trades at an EV/2021E Revenue multiple of roughly 10 right now. Accounting for modest changes in the share count and cash pile the stock could trade up near 20 by the end of 2021 based on my target EV/2021 revenue multiple of 16.
Buy Range: Buy below 15, and ideally below 14. Average in and use volatility to your advantage. I strongly suggest placing limit orders at various prices down to 12, and maybe slightly lower, especially if you’re not able to monitor the stock throughout the day. This is about building a position at a reasonable average cost in a newly-public stock, not trying to pick the “right” price.
The Next Event: Management will present at the Needham Growth Conference on January 11.
Updates on Current Recommendations
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The next Cabot Small-Cap Confidential issue is scheduled for February 4, 2021.
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