Olo’s $4 Billion IPO: Reasons to Be Bullish on the Stock

The news has been bristling with initial public offerings, or IPOs, for months now, as investors and SPACs go wild with new launches as COVID-19 recedes.

Today has seen the foodservice technology company Olo go public on the New York Stock Exchange, with the ticker (NYSE: OLO). My colleague Evan Niu covered its IPO earlier, but the important details is that after pricing its offer at $25 shares quickly climbed above $30, giving the company a $4 billion-plus valuation.

If you’re reading news about Olo’s IPO the next question on your mind is likely whether it’s a buy. After all, DoorDash (Nasdaq: DASH) is now worth $43 billion while Uber Technologies (Nasdaq: UBER) has ridden the growth of Uber Eats to a $105 billion valuation.

Even Grubhub (NYSE: GRUB) is worth $6.3 billion. That leaves Olo as quite a bit smaller than the group, but it also has a business model that differs quite a bit from other technology companies in the online ordering space.  

Does this small size plus a rapidly growing market spell opportunity? Here’s a closer look at the details behind this stock exchange newcomer.

How Olo Got to Its IPO

The mission statement of Olo is contained in its very name, which is a contraction of “Online Ordering.” Unlike delivery companies like Grubhub and DoorDash, Olo doesn’t actually handle food, instead, it provides software platforms to restaurants. These include:

·  Digital ordering software for menu and order management

·  On-demand delivery software streamlining the connection between customers, delivery services, and restaurants

·  Secure digital ordering platforms said to be capable of processing 50 orders per second

Olo has existed quietly in the background of the restaurant industry for over 15 years since its 2005 founding. Just like those selling picks and shovels to the “Forty-Niners” were said to have gotten richer than the gold prospectors themselves, Olo’s positioning appears to be successful so far.

While delivery services such as DoorDash are still generating losses and operating in the red despite a vast upsurge in orders during COVID-19, Olo says its revenue grew 94% year over year in 2020, reaching $98.4 million for the year, with a net income of $3.1 million.

While only narrowly positive, this is better profit margins than any of the major delivery companies manage and makes Olo one of a rare breed of IPOs actually generating positive net income at the time they go public.

Some Key Facts About OLO

With the market looking strongly in favor of Olo’s IPO at the moment in afternoon trading, here are some of the known facts about the company:

·  The company has approximately 400 brands already using its software, including Shake Shack (NYSE: SHAK), Brinker International (NYSE: EAT) subsidiary Chili’s Bar & Grill, Sweetgreen, Wingstop Inc. (Nasdaq: WING), and Five Guys Enterprises LLC

·  Plans to partner with small and medium businesses also for on-demand platforms

·  $75.8 million in cash and cash equivalents

·  Zero outstanding debt

·  Software already handles 68,000 restaurants, 1.8 million orders daily, and $14.6 billion worth of food in 2020

Time to Buy Olo Stock? A Cautiously Bullish Take

Olo looks surprisingly robust for an IPO, even generating a positive profit last year, and with a business model positioned to make the most of the boom in restaurant deliveries and pickups.

At the same time, unlike delivery companies, it has a relatively low overhead, which allowed it to move from net losses to net income as soon as the top line picked up.

In terms of enterprise value to revenue (EV/Revenue), the company appears to be rather highly valued at approximately a 40x multiple of last year’s revenue.

If restaurants move away from costly delivery companies toward handling their own deliveries, the efficiency offered by Olo’s platform will make it an attractive choice to these companies, enabling them to gain the benefits of a strong software infrastructure without needing to develop and manage it themselves.

Conversely, if third-party delivery remains strong, Olo can still sell its software to keep all the various moving parts operating in sync. This stock appears to have a solid base regardless of the future direction of restaurants and looks like a good buy, with caution.

The next blockbuster IPO?

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There’s a company that “called” these businesses long before they hit it big. They first recommended Netflix in 2004 at $1.85 per share, Amazon in 2002 at $15.31 per share, and Apple back in the iPod Shuffle era at $4.97 per share. Take a look where they are now.

That company: The Motley Fool.

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